Companies Act 2006 – sections 974

Meaning of takeover offer and entitlement to dividends (sections 974 and 976)

1249. In order to be a takeover offer for the purposes of Part 13A of the 1985 Act, an offer
to acquire shares had to be on terms which were the same in relation to all the shares to which
the offer related. One problem with the 1985 legislation was how to treat any variations in
value between shares of the same class that were attributable to the fact that some of the
shares, because they were allotted later, do not yet carry a dividend. Section 976(2) rectifies
this problem by providing that, even if the offeror offers to pay more for shares that carry a
dividend than for those in the same class which do not, the offer will be treated as being made
on the same terms in relation to those shares.
Meaning of a takeover offer and communication of that offer (sections 974 and 978)
1250. To deal with issues arising from an increasingly globalised market in shares and
different legislative regimes outside the EEA, it is made clear that an offer is not prevented
from being a takeover offer for the purposes of Chapter 3 of Part 28 merely because there are
some offerees who will be unable to accept it (for instance, where the offeree cannot accept
the offer because of restrictions on the cross-border transfer of cash or securities in the
country in which the offeree resides). It is also provided that an offer can still be a takeover
offer for the purposes of the squeeze-out and sell-out provisions if a shareholder has no
registered address in the UK and the offer is not communicated to him to avoid contravening
the law of another country as long as either the offer itself is published in the Gazette or a
notice is published in the Gazette stating that a copy of the offer document can be obtained
from a place in the EEA or on a website.

Shares that the offeror has “contracted to acquire” (section 975)

1251. Clarificatory amendments are made on this issue. Section 428(5) of the 1985 Act dealt
with the offeror’s position at the start of the bid, for the purpose of determining which shares
could not be counted towards the achievement of the 90% threshold (at which point shares
may be compulsorily purchased). It was unclear as to whether the phrase “contracted to
acquire” in section 428(5) covered conditional as well as unconditional contracts. It is,
therefore, clarified that, in ascertaining the offeror’s position at the start of the bid, the shares
he has conditionally contracted to acquire (other than those subject to irrevocable
undertakings (see below), as under the 1985 Act) should be treated as being shares already
held by the offeror. This means that only shares that the offeror has either acquired or
unconditionally contracted to acquire will count towards the 90% total needed to exercise
squeeze-out. Consequential changes are also made to the provisions on joint offers and
associates of the offeror to bring these into line with the above.

1252. Under the 1985 Act, the registered holder of shares could give an irrevocable
undertaking to accept a takeover bid, and if he did this for no consideration or only in
exchange for a promise to make the bid, his shares were still treated for the purposes of
squeeze-out as included within the offer. This is extended to include undertakings given for
only negligible consideration and undertakings the effect of which is to require the registered
holder to accept the offer (where the undertaking is given by a person who is not the
registered holder of the shares but can contract to bind the registered holder, such as the
manager of shares held by a bare nominee). (“Irrevocable undertakings” are contractual
agreements entered into by a bidder usually with major shareholder(s) of a proposed target
company. Such agreements aim to give the bidder certainty – he will know that support for
the offer can be guaranteed from shareholders party to the contract – so that his bid has a
greater prospect of success. Such undertakings would normally prevent the giver of the
undertaking from selling their shares or exercising voting rights to prevent the takeover from
becoming successful.)

Date of the offer (section 991(1))

1253. The “date of the offer” is defined to mean either the date of publication, or if the offer
is not published or notice of the offer is sent out earlier, the date on which the offeror first
sends notice of the offer to the offerees.

Right of offeror to buy out minority shareholders: treatment of options etc (section
979(5))

1254. Where an offeror makes an offer for all the target company’s allotted shares and all or
any shares subsequently allotted, it is provided that (a) in deciding whether the offeror has
reached the 90% threshold for the purposes of section 979, the offeror need only bring into
the calculation shares which are actually in issue (i.e. allotted) at the relevant time; (b) if the
offeror serves squeeze-out notices and more shares are subsequently allotted which take the percentage of acceptances then received below 90%, that will not invalidate squeeze-out
notices already served; and (c) if the offeror wishes to serve further squeeze-out notices, he
must have at least 90% acceptances of shares (or shares in a class) then in issue and subject to
the offer at the time he sends the notices out.

Consideration not exclusively in cash (section 981(5))

1255. It is clarified that where an offer of shares, or a mixture of shares and cash, is made,
and it is no longer possible when the offeror exercises his right of squeeze-out to give the
consideration in shares, the offeror should pay the cash equivalent irrespective of whether the
shareholders had previously been offered a choice (i.e. whether the offer was “mix and
match” or not). Parallel changes are made as regards sell-out (section 985(5)).

Shares that the offeror has “contracted to acquire” (section 983)

1256. It is clarified that, in addition to shares acquired by the offeror, shares subject to both
conditional and unconditional contracts of acquisition are included in calculating whether the
sell-out threshold has been reached. As a result of this change, there might be circumstances
where the 90% threshold required for sell-out to be exercised was reached only because of
shares which the offeror had conditionally contracted to acquire. However, if the conditions
of such contracts were not fulfilled, the offeror could in fact find that he was being required
to buy a minority shareholder’s shares even though the offeror had not actually acquired 90%
of the shares. So section 983 also provides that, if that is the case at the time when the
minority shareholder exercises his right of sell-out, the offeror does not have to purchase the
shares unless he has acquired or unconditionally contracted to acquire 90% or more of the
shares by the time the period referred to in section 984(2) (the period within which
shareholders can exercise sell-out rights) ends. (A corresponding change is made in section
979(6) and (7) to prevent minority shareholders in this situation who have to wait to see if
they can exercise sell-out from being squeezed out in the meantime.)

Applications to the Court (section 986)

1257. This section provides that a shareholder receiving a squeeze-out notice may make an
application to the court (within six weeks of receiving the notice) seeking to overturn an
offeror’s intention to purchase his shares compulsorily (or the terms of that purchase). A
requirement that the offeror be promptly notified of such an application is now included (this
was not previously required by section 430C of the 1985 Act). As a consequence of this
requirement, it is also required that the offeror is obliged, at the earliest opportunity, to notify
shareholders who are being squeezed out or who are exercising their rights of sell-out, and
are not party to a section 986 application, that proceedings have been initiated.