United Kingdom Takeover Guide

United Kingdom Takeover Guide Contact Craig Cleaver Slaughter and May craig.cleaver@slaughterandmay.com

Contents Page INTRODUCTION 1 REGULATORY BACKGROUND 1 ACQUISITION STRUCTURES 2 CONSIDERATION 3 CONCERT PARTIES 4 COMPULSORY BIDS 5 ANNOUNCEMENTS 5 TARGET DIRECTORS DUTIES 6 SQUEEZING OUT MINORITY SHAREHOLDERS 8 DE-LISTING 9 CROSS-BORDER MERGERS 9 30285798_1_2014 - takeover guide - united kingdom

INTRODUCTION This guide gives a general overview to takeovers of companies subject to The City Code on Takeovers and Mergers (the City Code ). This guide deals primarily with UK legislation and rules. However, regulations in other jurisdictions may be relevant to a takeover of a UK incorporated and listed company; for example, when that company has overseas listings or assets. REGULATORY BACKGROUND Takeovers in the UK are regulated by the Panel on Takeovers and Mergers (the Panel ), which administers the City Code. The Panel has statutory authority to carry out certain regulatory functions in relation to takeovers (with certain enforcement powers). The City Code outlines the conduct to be observed in takeover and merger transactions and dual holding company transactions. It applies, broadly speaking, to all companies and societas europaea (and, where appropriate, statutory and chartered companies) which have their registered offices in the UK, the Channel Islands or the Isle of Man if any of their securities are admitted to trading on a regulated market in the UK or on any stock exchange in the Channel Islands or the Isle of Man, as well as to offers for public companies which do not have securities traded on a regulated market (and certain private companies), but which are considered by the Panel to be resident in the UK, the Channel Islands or the Isle of Man. (The City Code can only apply to certain types of private company, chiefly where the equity share capital of it has, at any time during the ten years prior to the offer, been to some degree publicly held.) The status or residence of the bidder is immaterial. The City Code comprises six general principles and 38 rules (as well as numerous notes which aid the interpretation of the rules). Its underlying objective can be summed up in three underlying principles:- all shareholders of the same class in a target company must be treated equally and must have adequate information so that they can reach a properly informed decision; a false market must not be created in the securities of the bidder or the target company; and the management of the target company must not take any action which would frustrate an offer without the consent of its shareholders. The 38 rules, which form the bulk of the City Code, are effectively expansions of the general principles and contain provisions governing specific aspects of a takeover. Both the spirit as well as the precise wording of the City Code are required to be observed. The Panel is not concerned with the financial or commercial advantages or disadvantages of a takeover, which the Panel regards as matters for the company and its shareholders. The UK Listing Authority ( UKLA ) Rules may also be relevant whenever one of the parties to a takeover is listed, or is seeking a listing on the Main Market of the London Stock Exchange. If the bidder is listed, the UKLA Rules will require it to obtain consent from its own shareholders if the takeover is a comparatively large acquisition. In addition, if the bidder is offering its own listed securities as consideration, the UKLA Rules will prescribe the contents of the prospectus or equivalent document. 30285798_1_2014 - takeover guide - united kingdom page 1

ACQUISITION STRUCTURES A takeover can be carried out by the bidder making an offer to acquire the shares held by the target company s shareholders, or by the target company initiating a statutory court process called a scheme of arrangement. Both structures are governed by the City Code, the rules of which are modified appropriately where a scheme of arrangement is being used. There are now two further structures available to UK companies wishing to undertake a true merger under the Companies (Cross-Border Mergers) Regulations 2007 (see paragraph on Cross-border Mergers). Such structures have so far never been used in the public arena in the UK. In the case of an offer, the target shareholders are asked to accept the offer being made to them by the bidder. Typically the offer period starts once the announcement of a firm intention to make an offer is made (see section 7 below) and the bidder must then send the offer document to the target shareholders setting out the terms of the offer within 28 days. The offer must then be open for acceptance for at least 21 days. If the offer is revised, then a revised offer document needs to be sent to the target shareholders and the revised offer needs to be kept open for at least 14 days. A scheme of arrangement generally only used in recommended offers where there is no reasonable likelihood of a competing bid and follows a different timetable, typically taking 3-4 months to implement. A scheme of arrangement is a formal arrangement between a company and its shareholders and needs to be approved both by the shareholders (the requisite majority is 75% of the votes cast and a simple majority in number of the shareholders voting) and by the High Court. The arrangement is binding on the target company and on all the shareholders involved. The fact that a scheme of arrangement is binding on all the relevant shareholders provides certainty and can offer particular attractions when a bidder is confident of gaining the support of target company shareholders holding 75 per cent. of the shares, but believes that the 90 per cent. level needed for the compulsory acquisition procedures (see section 9 below) to apply may be difficult to attain. Also, where a scheme of arrangement is implemented not by way of transferring shares in the target company but, instead, by cancelling shares in the target company and utilising the resulting reserve in issuing new shares to the offeror, there is a resulting advantage in the fact that no stamp duty (currently payable at the rate of 0.5 per cent.) is payable (there being no transfer of shares). In general, a scheme of arrangement is a less flexible procedure, particularly The City Code was amended in September 2011 to, among other things, introduce new provisions which require the offeree company to implement a scheme in accordance with an expected timetable to be published in the scheme circular, subject to certain exceptions. The new provisions also impose an obligation on the offeree company to ensure that the scheme circular is sent to shareholders and persons with information rights within 28 days of the firm offer announcement, unless the Panel agrees to a longer period. The new provisions provide that the parties to the offer will also be permitted to include within the conditions to the scheme a long-stop date by which the scheme must become effective (unless extended with the agreement of the parties to the offer), a specific date by which the shareholder meetings must be held (unless extended by agreement of the parties), provided that the specified date is more than 21 days after the expected date of the shareholder meetings to be set out in the scheme circular, and a specific date by which the court sanction hearing must be held (unless extended by agreement of the parties), again provided the specified date is more than 21 days after the expected date of the hearing to be set out in the scheme circular. The Code Committee has said that it expects that the parties will negotiate the specific dates, and whether such a condition should be included at all, in each case. Any such conditions must be included in the bidder's announcement of a firm intention to make an offer. However, where the expected dates for the shareholder meetings or court sanction hearing have not been approved by the court by the time of the firm offer announcement, 30285798_1_2014 - takeover guide - united kingdom page 2

the Code Committee has set out an example of the terms on which it would be acceptable for such conditions to be expressed in the firm offer announcement. CONSIDERATION Type of consideration There are generally no restrictions on what sort of consideration may be offered in a UK voluntary offer. Types of consideration may therefore include cash, loan notes, shares, warrants or convertible/exchangeable bonds. However, there are additional rules for compulsory bids. A large proportion of UK takeover bids have a cash element as part of their consideration, mainly because this is more attractive to many target shareholders. However, acceptance of a cash offer will constitute a disposal for UK capital gains tax purposes and so cash consideration is often accompanied by a loan note alternative. The loan notes are generally unlisted and have a rate of interest which is below the applicable bank rate. Alternatively, target shareholders may be offered shares in the bidder (or its parent), for example if the bid is intended to create an equal merger between the parties, or if the target is being acquired for a price which could be viewed as cheap and the target shareholders wish to share in the future upside. This is known as a securities exchange offer. The bidder must normally provide cash or a cash alternative to target shareholders in a compulsory bid (see section 6 below), or where the bidder and its concert parties acquire any interest in shares for cash during the preceding 12 months or which carries 10% or more of the voting rights or where the bidder and its concert parties acquire any interest in shares for cash during the offer period (at the highest price paid during the offer period). Cash may also be required if the Panel otherwise considers it appropriate (e.g. where there have been cash purchases from directors). In addition, the bidder must normally provide securities or a securities alternative to target shareholders if the bidder and its concert parties have acquired interests in shares in the target during the three months prior to the offer period or during the offer period in exchange for securities and such shares carry 10% or more of the target company voting rights. Such securities must be offered on the basis of the same number of securities per target share, not on the basis of equivalent value. Where securities are to be offered and which are listed, the offer document must also contain full particulars of the rights attaching to the securities and a statement indicating the effect of acceptance on the capital and income position of the target company s shareholders (e.g. how the dividends paid in the last 12 months on the bidder s shares compare with the dividends paid in the last 12 months on the target s shares) and the effect of the acquisition upon the bidder s assets, profits and business. The bidder may also be required to produce a prospectus under the UKLA Rules. Another issue to consider when offering shares is the presence of foreign target shareholders. A cash offer can be sent to most jurisdictions, whereas an offering of shares may in certain jurisdictions require registration statements and other such documentation. Therefore, if an offering of shares is to be made, the target shareholders locations must be taken into consideration, as must the possibility of encountering problems in these jurisdictions, since the time spent drafting and having the additional documents approved could impact upon the proposed timetable. 30285798_1_2014 - takeover guide - united kingdom page 3

Price In general, a bidder making a voluntary bid is free to offer whatever price it wishes. However the City Code specifies certain minimum bid prices in certain circumstances. Where the bidder, or any person acting in concert with it, acquires an interest in shares in the target company during the three months prior to the offer period or during any period between the commencement of the offer period and the announcement of a firm intention to make an offer, the bid price must not be less than the highest price paid by the bidder (or person acting in concert with it) during that period. If the bidder stated prior to making its offer that it was considering making an offer at a particular price, it will generally not be permitted to make an offer at a lower price. In the following circumstances, the offer price must also not be less than the highest price paid by the bidder for shares in the 12 months prior to the offer period and during the offer period: where a compulsory bid is required (see section 6 below); or where the bidder and its concert parties have acquired an interest in shares in the target for cash during the preceding 12 months which carries 10% or more of the target company voting rights. (In this context, an acquisition for cash includes an acquisition made in exchange for securities unless the seller is required to hold the securities until the end of the subsequent offer.) Where a company has more than one class of equity share capital, a comparable offer must be made for each class of shares, whether or not such capital carries voting rights. A comparable offer does not have to be identical but differences must be capable of being justified to the Panel (e.g. by reference to the differential between the market prices of the different share classes). The Panel must be consulted in advance. If the bidder is left with a number of minority shareholders in the target and the squeezeout procedure cannot be used (see section 9 below), it is prevented from offering them a higher price than the offer price for a period of six months after the offer closes. CONCERT PARTIES Concert parties are relevant in a number of ways under the provisions of the City Code. Their holdings and acquisitions of shares are aggregated for the purposes of the compulsory bid requirement and also for provisions relating to the setting of the minimum consideration for an offer (among other things). In general their actions will be taken to be the actions of the bidder. For the purposes of the City Code, persons acting in concert (or become concert parties ) if, pursuant to an agreement or understanding (whether formal or informal), they co-operate to obtain or consolidate control of a company, or to frustrate the successful outcome of an offer for a company. The City Code lists a number of categories of persons who will be presumed to be acting in concert unless the contrary is shown. These include: a person with its affiliated persons. The definition of affiliated persons is similar to the UK Companies Act 2006 definition of subsidiary undertaking and comprises any undertaking in respect of which: the person has a majority of members voting rights; the person is a member and has either the right to appoint or remove the majority of its board of directors, or controls a majority of 30285798_1_2014 - takeover guide - united kingdom page 4

members voting rights under an agreement with other members; or the person has dominant influence or control; a company with its parent, subsidiaries, fellow subsidiaries, 20% associated companies and pension funds (if not managed independently); a company with its directors (and their related trusts and close relatives). Directors of a target company will be deemed to act in concert with each other only where an offer is imminent or in process; and a person with its advisers and with companies in the same group as their advisers. COMPULSORY BIDS A bidder will be required to make a compulsory bid where it either: acquires (whether or not pursuant to a series of transactions or over a period of time) an interest in shares which, together with shares in which the bidder is already interested, carry 30 per cent. or more of the voting rights in a target company; or where it is interested in shares which carry 30 per cent. or more but less than 50 per cent. of the voting rights in a target company, acquires an interest in shares in that company which increases the percentage of its voting rights. There are limited purchasing freedoms for controlling shareholders and to allow shareholders to take up their entitlement under secondary issues. The following additional rules apply in relation to a compulsory bid: the offer is permitted to be conditional only upon the level of acceptances referred to below and, if appropriate, there being no reference to the Competition Commission or action being taken by the European Commission or a competent authority of the UK under the relevant European Community regulation; the acceptance condition is that only 50 per cent. (plus one share) acceptances are required; and the offer must be for cash or accompanied by a full cash alternative at not less than the highest price paid by the bidder for target shares within the preceding 12 months. Any purchase resulting in a compulsory bid becoming required must be immediately followed by an announcement that such an offer is to be made. ANNOUNCEMENTS An announcement of an offer is primarily required when a firm intention to make an offer (not being subject to a pre-condition) is notified to the board of a target company from a serious source. In this case, the announcement made will probably be a firm or Rule 2.7 announcement. This type of announcement places an obligation on the bidder to go ahead with its bid and must therefore only be made after the most careful and responsible consideration, and only when the bidder believes it is able to implement the offer. The City Code requires an announcement to be made in certain circumstances if the target company is the subject of rumour or speculation, or if there is an untoward 30285798_1_2014 - takeover guide - united kingdom page 5

movement in its share price. The bidder would also be under an obligation to make an announcement under the UKLA Rules where it has caused a leak, if knowledge of the proposed offer would be likely to lead to a substantial movement in its own share price. The City Code also requires an announcement to be made if negotiations in relation to the proposed offer are going to be extended (beyond the parties themselves and their advisers) to more than a very restricted group of people. The Panel allows a bidder to contact up to six parties about the proposed offer before it has to consult with the Panel about a possible announcement. This places quite serious restrictions on a bidder that is arranging a consortium offer, or seeking finance. If a target board is itself seeking a purchaser, it should consult the Panel or make an announcement before contacting more than one possible bidder. In the cases referred to in the paragraph above, the announcement made is unlikely to be a firm or Rule 2.7 announcement. This kind of possible offer announcement does not oblige the offeror to proceed with its bid, although it does mark the start of an offer period. After the date of the announcement in which it is first identified, a potential offeror is subject to a 28 day deadline by which it must put up or shut up - either announce a firm intention to make an offer or announce it does not intend to make an offer. The Panel may consent to an extension of the deadline if this is requested by both the offeror and the target company, and indeed the Panel has indicated that it will normally consent to an extension in such circumstances. However, extensions will only be granted when the 28 day period is close to expiry. Following recent changes to the City Code, any announcement made by the target company which commences an offer period must now identify any potential offeror with whom the target company is in talks or from whom an approach has been received. A firm Rule 2.7 announcement must also be made without delay if a person becomes obliged to make a compulsory bid for a target. In these circumstances, the announcement must not be delayed while full information is being obtained for the announcement additional information can instead be included in a further supplementary announcement. If a bidder, having made an announcement of a possible offer, withdraws the offer or allows it to lapse, it may thereafter be prevented from making any future offer for a period of 12 months. If a party specifically makes an announcement that it does not intend to make an offer, it will in any case be prevented from making an offer for a period of six months. Except with the consent of the Panel, such a statement may only be set aside in certain circumstances, which include if there is a material change of circumstances. The City Code requires that, promptly after the commencement of an offer period, a copy of the relevant announcement (which may either be a Rule 2.7 announcement, or a much shorter holding announcement), or (in the case of a Rule 2.7 announcement) a circular summarising the terms and conditions of the offer in question, must be sent by the target to its shareholders and the Panel. The bidder and target must also make a Rule 2.7 announcement (or circular) available to their employee representatives (or, where there are no such representatives, to the employees themselves). TARGET DIRECTORS DUTIES The directors of the target company owe their duties to the company and are required to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its shareholders as a whole. Directors must have regard to the following matters (among others) when discharging this duty: the likely consequences of any decision in the long term; the interests of the company s employees; 30285798_1_2014 - takeover guide - united kingdom page 6

the need to foster the company s business relationships with suppliers, customers and others; the impact of the company s operations on the community and the environment; the desirability of the company maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the company. Directors are only obliged to have regard to the factors listed above and are not required actively to promote the interests of these interest groups. However, target directors need to ensure that they are able if necessary to demonstrate that they had regard to the relevant factors when making decisions affecting the company. In addition, directors must not act for an improper purpose and must be free of, or disclose, any actual or potential conflict of interest. The primary purpose of the directors actions must not be self interest and they cannot, for example, act simply in order to preserve their own management control or position. Target directors have a duty to ensure that shareholders are given: all information necessary to enable them to reach an informed judgment on their investment decision, which is whether or not to accept the offer; and advice founded on the interests of the company and its shareholders. The directors are entitled to rely on, and may have a duty to take account of, advice from financial and other advisers. Appendix 3 to the City Code sets out guidelines which should be followed by directors in relation to an offer. It provides that while the board of directors may delegate the day to day conduct of an offer to individual directors or a committee of directors, the board of directors as a whole must ensure that proper arrangements are in place to enable it to monitor that conduct in order that each director may fulfil his responsibilities under the City Code. The board of directors must be provided promptly with copies of all documents and announcements issued by or on behalf of the bidder which bear on the offer, details of all dealings in relevant securities made by the bidder or its associates and details of any agreements, understandings, guarantees, expenditure (including fees) or other obligations entered into or incurred by or on behalf of the bidder in the context of the offer which do not relate to routine administrative matters. The City Code states that the board of the target company must obtain competent independent advice on any offer, and this advice must be made known to its shareholders. The City Code requires the directors of the target company to accept responsibility for any document issued by the target company which relates to an offer. This includes any offer-related information that may be published on a website. The City Code requires that once an offer has been communicated to the target company board, or after the board of the target company has reason to believe that a bona fide offer might be imminent, no action should be taken by the target board which could result in any offer or bona fide possible offer being frustrated or in the target shareholders being denied an opportunity to decide on its merits, unless the shareholders have given their approval in general meeting or the bidder agrees that the target may take the relevant action, and the Panel therefore waives the application of the rule. Such frustrating actions include: the issue or granting of options over any unissued shares (subject to certain exemptions); creation or issue of any securities that can be converted into shares; sale, disposal of or acquisition of, assets of a material amount; entering into contracts otherwise than in the ordinary course of business (including entering into a new directors service contract or amending an existing directors service contract on terms where the change is an abnormal increase in emoluments or a significant improvement in the terms 30285798_1_2014 - takeover guide - united kingdom page 7

of service); or agree to do any of the aforementioned. The test of materiality is not an exact science and if any action is proposed to be taken advice must be sought from the Panel at the earliest opportunity. SQUEEZING OUT MINORITY SHAREHOLDERS A bidder has a right to compulsorily acquire the shares of minority shareholders of a UK target company if it has acquired, or unconditionally contracted to acquire, not less than 90 per cent. of the shares to which the offer relates and 90 per cent. of the voting rights in the company to which the offer relates. Once this threshold is reached, the bidder may send out compulsory purchase notices immediately or at any time up to three months and a day after the last day on which the offer can be accepted. If a bidder purchases ordinary shares in a target company prior to the time at which it makes (and not just announces) an offer, then such shares are not shares to which the offer relates and may not, therefore, be counted towards this 90 per cent. acceptance condition. If, however, a bidder purchases ordinary shares during the period within which the offer can be accepted (that is, after it is made, not just announced) then those shares can be counted towards this 90 per cent. acceptance condition, provided that: the consideration for the purchase does not exceed the value of the offer; or if it does exceed the value of the offer, the terms of the offer are increased up to at least the consideration for the purchase. Minority shareholders have two balancing rights of lesser practical importance. First, they can apply to the Court for an order that the bidder may not acquire their shares or must alter the terms on offer. Such applications would only succeed in exceptional circumstances and are extremely rare in practice. Secondly, the minority may require the bidder to purchase their holdings on the terms of the offer once a simple 90 per cent. of both the issued shares and the voting rights in the target have been acquired, whatever the method of acquisition. This enables dissenting shareholders to resist the takeover until the eleventh hour without risking retention of a holding which has little more than nuisance value. Where alternative types of consideration were available under the offer, even if subsequently closed, they must again be made available to those whose shares are compulsorily acquired. If the original offer included any choice of consideration, the minority shareholders must be presented with the same choice even if the choice was only available to accepting shareholders during part of the offer. In certain cases, therefore, a shareholder may benefit from not accepting an offer in its later stages, but instead waiting to be squeezed out. The only exception to the requirement to provide the same choices of consideration applies where the bidder has offered some form of non-cash consideration and is no longer able to provide that consideration (e.g. it has no more consideration shares to issue). In this case, the bidder may instead provide an amount of cash which is equivalent to the unavailable consideration as at the date of the compulsory purchase notice. If a bidder fails to reach the 90% mark with its offer and subsequently wishes to make a new offer, or propose a scheme, to the remaining minority shareholders, the bidder may wish to offer the minority a higher price as an inducement. However, under the Code, no acquisitions of any interests in target shares may be made on more favourable terms than the offer for a period of six months from the closure of the offer. In addition, the bidder may not agree any special deal with any of the minority shareholders during that period. 30285798_1_2014 - takeover guide - united kingdom page 8

The bidder may therefore have to delay its tidying up of the minority until the six months has expired. As referred to in section 3 above, an offer structured as a scheme of arrangement can be approved by a target shareholder vote of 75% by value of the target shareholders attending the relevant shareholder meeting and if approved will be binding on all target shareholders whether they voted or not. If a bidder first makes a takeover offer but does not manage to reach the 90% threshold as described above, it could consider instituting a scheme of arrangement (with the same consideration) in order to acquire the outstanding minority. DE-LISTING De-listing of the target from the LSE/UKLA should be straightforward following an offer, provided that the bidder has stated its intention to de-list in the offer document (or a subsequent document sent to target shareholders). The document must state that a notice period of not less than 20 business days will automatically start to run on either (i) the bidder acquiring or agreeing to acquire shares carrying at least 75% of the voting rights in the target; or (ii) compulsory acquisition notices being sent to minority shareholders. The announcement that the offer is unconditional (or the explanatory letter sent to minority shareholders) must then remind people that the notice period has commenced and state the anticipated date of cancellation of the listing. Delisting following the implementation of a scheme of arrangement is effectively automatic. The LSE/UKLA must be notified in advance of the date that the scheme is to become effective. CROSS-BORDER MERGERS There are now two further structures available to UK companies wishing to undertake a true merger under the Companies (Cross-Border Mergers) Regulations 2007. Both structures must involve at least one UK company (as offeror or target) and at least one company governed by the law of an EEA Member State other than the UK (again as offeror or target). The first structure involves a scheme under which the target transfers its assets and liabilities to the offeror and is then dissolved. The second structure involves forming a new company (the offeror) for the purpose of acquiring two or more targets, at least two of which are governed by the law of a different EEA Member State. Each target then transfers its assets and liabilities to the new company and is subsequently dissolved. The consideration in both of these structures must involve at least a partial issue of shares in the offeror. Such structures have so far never been used in the public arena in the UK. 30285798_1_2014 - takeover guide - united kingdom page 9