Following Monday's Rule 2.7 announcement that Ingredion has agreed to acquire Tate & Lyle, the inclusion and formulation of the Material Antitrust Conditions has attracted particular attention and prompted questions about their potential implications.
Materiality, Antitrust Conditions and the Takeover Panel's approach
In short, the Takeover Panel has no specific or defined materiality threshold for invocation of a condition, and it is not possible to determine a threshold from precedent transactions. It is a qualitative judgement by reference to the facts of each case at the time that the relevant circumstances arise and it is a very high threshold. The 2.7 announcement has been drafted, as many other 2.7 announcements have, to lay as strong a groundwork as possible for any future application to invoke a condition, but that in no way indicates that invoking the condition(s) will be permitted by the Takeover Panel.
Whilst specific disclosure regarding antitrust MACs is relatively uncommon, we have seen it (or variations of it) on recent transactions such as: (i) Tinicum Incorporated and Blackstone Inc.'s offer for Senior plc (here); (ii) Unite Group plc's offer for Empiric Student Property plc (here); and (iii) Greencore Group plc's offer for Bakkavor Group plc (here).
Contractual carve-out in the co-operation agreement
On a Takeover Code transaction, the parties are free to agree the level of obligation the bidder undertakes in pursuit of regulatory clearances. "All reasonable efforts" is the Takeover Code standard under Rule 13.2 and the bidder has agreed in the co-operation agreement to take all necessary steps to satisfy the regulatory conditions, which is a strong commitment (and about as high as has been seen (i.e. a hell or high water standard), but subject to the carve-out), alongside "best endeavours" and above "reasonable endeavours" on the accepted hierarchy of endeavours standards. However, the parties have also agreed that the bidder shall not be required to accept remedies that are adverse to a material extent to the bidder's group taken as a whole.
In this case, the parties have not defined in publicly available documents what "adverse to a material extent" means. Parties sometimes set out more specific parameters for what constitutes "adverse to a material extent" (for example, disposals exceeding X% of revenue or EBITDA of the bidder group). Nonetheless, the private understanding between the parties does not in itself mean the Takeover Panel will allow it to be invoked (see below) and should not be considered a hair trigger – i.e. if the disposal threshold is exceeded by one per cent. (1%), it is unlikely that the parties would proceed straight to termination, or that the bidder could force the target to do so, or that the Takeover Panel would be particularly swayed by that understanding. But parties often do not want to specify definitive thresholds in publicly available documents as they may give regulatory authorities a roadmap as to what remedies the bidder would or would not accept, and so there may be a concern that such detail could enable regulators to seek to calibrate their remedy packages just below any publicly disclosed threshold.
The 2.7 announcement states that the bidder intends to seek the Takeover Panel's consent to invoke a Material Antitrust Condition (listed below) where the only means of satisfying that condition would be disposal-based remedies that are adverse to a material extent to the bidder's group taken as a whole. This is because the integrity of the combined group's portfolio is stated to be an essential part of the strategic and economic rationale for the acquisition. The Material Antitrust Conditions cover eleven jurisdictions: the European Union, Brazil, Canada, China, Colombia, Mexico, South Korea, Tanzania, the United Kingdom, the United States and Zanzibar (paragraphs 3(a) to 3(l) of Part A of Appendix 1 to the 2.7 announcement). Eleven regulatory consents is an unusually large number to identify as material, but these conditions are proliferating and this is not materially off-market, though at the longer end by historic standards.
Takeover Panel's material significance test
The contractual position, whilst important as between the parties, is neither binding on the Takeover Panel nor determinative of whether the bidder can actually invoke a Material Antitrust Condition to walk away. The materiality threshold in the co-operation agreement is simply the contractual gateway that determines whether the bidder has the right to challenge a remedy at all. It does not bind the Takeover Panel's assessment, and satisfying the contractual threshold does not automatically entitle the bidder to invoke the condition. That requires a separate application to the Takeover Panel and a separate analysis.
Under Rule 13.5(a) of the Takeover Code, the bidder may only invoke a condition so as to cause the acquisition not to proceed, to lapse or to be withdrawn with the consent of the Takeover Panel. The Takeover Panel will normally only give its 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 acquisition, and this will be judged by reference to the facts of each case at the time that the relevant circumstances arise. There are no published percentage thresholds and no pre-defined financial metrics. The Takeover Panel has consistently and deliberately declined to give advance guidance on what would or would not satisfy the materiality test, to preserve its discretion to make a contextual assessment at the relevant time.
Although the Takeover Panel has not published prescribed criteria, certain factors have emerged from practice and the Takeover Panel's own practice statements (in particular, Takeover Panel Practice Statement No. 5) as being relevant to the materiality assessment. These are set out below. The parties' legal teams will have had these in mind when drafting this announcement, and the 2.7 announcement has been deliberately structured to lay as strong a groundwork as possible for any future application.
- Whether the condition was subject to negotiation – the 2.7 announcement expressly states that the Material Antitrust Conditions were included following specific negotiation between the target and the bidder, and to take account of the particular circumstances of the target and the acquisition. This is not boilerplate language and is a deliberate signal to the Takeover Panel that these conditions were the product of arm's-length negotiation between sophisticated, advised parties rather than simply standard-form conditions appended to the announcement. The Takeover Panel gives considerably greater weight to conditions that have been genuinely negotiated.
- The level of disclosure around the condition and whether it is specific to the target – the Material Antitrust Conditions are flagged prominently throughout the announcement. They are described as being of material significance to the bidder in the context of the acquisition and specifically drawn to the attention of target and bidder shareholders. Prominent and specific public disclosure at the time of the 2.7 announcement is a factor the Takeover Panel weighs when subsequently considering an application to invoke.
- Foreseeability of the circumstances and the actions taken by the bidder since the occurrence of those circumstances.
- Views of the target board at the time the circumstances arise – this 2.7 announcement does not go as far as some precedents (see Shurgard acquisition of Lok'N Store here) where the target board affirmatively stated in the 2.7 announcement that it agreed certain circumstances would be of material significance to the bidder and that it does not intend to object to Takeover Panel consent to invoke the condition being sought.
- Significance of the regulatory clearance to the bidder – the announcement specifically links the walk-away right to the integrity of the combined group's portfolio being an essential part of the strategic and economic rationale for the acquisition. This formulation ties the invocation right to a fundamental characteristic of the deal and it mirrors the language of Rule 13.5(a) by characterising the relevant circumstances as being of material significance.
- What action the bidder would need to take to obtain the clearances and the consequences of those actions for the bidder – i.e. the extent of the remedies.
- The consequences for the bidder / directors if the offer completes without obtaining the clearances – i.e. would it be illegal.
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