Overview
The Substantial Acquisition of Shares and Takeovers Regulations 1997 (the 1997 Regulations) implement the EU Takeover Directive in the United Kingdom. Their purpose is to ensure that shareholders receive fair treatment when a company becomes the target of a takeover, to protect minority shareholders, and to maintain confidence in the market for corporate control.
The Regulations apply to public companies listed on a recognised stock exchange and, in many cases, to private companies whose shares are admitted to trading on such an exchange. They set out a series of procedural obligations that a person or entity must follow once they acquire a relevant interest in the shares of a target company.
Key Concepts
Relevant Interest
A relevant interest is an interest in the voting rights attached to shares that, when combined with any other interests the acquirer already holds, exceeds the 30% threshold (or any lower threshold set by the Takeover Panel for specific sectors). The 30% figure is the trigger for most of the mandatory duties.
Person
The term person includes natural persons, corporate bodies, partnerships, trusts and any other legal entity that can acquire shares, as well as those acting on behalf of another party (e.g., nominees, agents, or directors).
Target Company
The target is the company whose shares are being acquired. The Regulations treat each listed group company as a separate target, unless the takeover is directed at the whole group.
Takeover Panel
The Takeover Panel is the regulatory authority that administers the Rules, provides guidance, and enforces compliance. Its decisions are binding on the parties to a transaction.
Trigger Points for Disclosure and Offer Obligations
Once a person acquires a relevant interest, a series of duties arise:
- Initial Disclosure: The acquirer must notify the target, the Takeover Panel and the relevant market authority within two business days of crossing the 30% threshold.
- Mandatory Offer: Within 14 days of the initial disclosure, the acquirer must make a mandatory offer to purchase the remaining shares of the target at the highest price paid by the acquirer for shares in the 12 months preceding the offer.
- Further Disclosures: Any change in the acquirer's holding above or below the threshold, or any transaction that could affect the offer price, must be disclosed within the timeframes set out in the Regulations (typically within two business days).
These measures are intended to give all shareholders an equal opportunity to exit on the same terms and to prevent creeping control where an acquirer gradually builds a block without triggering the offer provisions.
Mandatory Offer Requirements
Offer Price
The offer price must be the highest price the acquirer paid for shares in the 12month relevant period before making the offer, or a price that is fair and equitable in the view of the Takeover Panel. The price must be unconditional and payable in cash, unless the Panel authorises a mix of cash and securities.
Offer Document
The acquirer must prepare a formal offer document that includes:
- Details of the acquirer and any associated parties.
- The offer price and method of payment.
- The conditions attached to the offer (e.g., minimum acceptance level).
- Information about any competing offers.
- A statement of the acquirers intentions for the target after the offer is accepted.
Minimum Acceptance Level
In most cases the offer will be conditional upon acceptance by holders of at least 50% of the voting rights (the minimum acceptance level). The Panel may reduce this threshold in certain circumstances, such as for smallcap companies.
Timetable
Once the offer is announced, the acceptance period must be at least 21 days for a cash offer (or 28 days if the offer includes securities). The acquirer must keep the offer open for the full period unless the Panel grants an extension.
Exemptions & Defences
Not every acquisition of a 30% stake triggers a mandatory offer. The Regulations provide a number of exemptions, including:
- Acquisition in the ordinary course of business: Purchases made on a recognised stock exchange at market price, without any intention to take control.
- Acquisition by a regulator or governmental authority: Where the purpose is to fulfil a statutory function.
- Acquisition of shares subject to a lockup: If the shares cannot be transferred for a specified period.
- Takeovers of investment funds: Certain collective investment schemes are exempt where the purpose is to protect the funds investment strategy.
Defences are also available to the target company, such as a poison pill (shareholder rights plan) that can be adopted to make a hostile takeover more costly, but any such defence must be compliant with the Regulations and notified to the Panel.
Compliance, Enforcement and Penalties
Compliance is monitored by the Takeover Panel, the Financial Conduct Authority (FCA) and, where appropriate, the Competition and Markets Authority (CMA). Failure to comply can result in:
- Financial penalties up to 1million per breach.
- Orders to unwind transactions that were carried out in breach of the Rules.
- Criminal sanctions for fraudulent misstatements in offer documents.
- Public reprimands and restrictions on future participation in takeover activity.
Companies and advisers often engage specialist legal counsel to ensure that all filing deadlines are met and that the offer document satisfies the fair and equitable test.
Recent Developments
Since the original 1997 Regulations, there have been several amendments to reflect changes in market practice and EU law. Notable updates include:
- Introduction of the singleslot rule limiting the number of simultaneous offers on a target.
- Strengthened rules on targeted offers aimed at protecting minority shareholders in the context of activist campaigns.
- Clarification of the definition of relevant interest for shares held by insurers and pension funds.
UK lawmakers continue to review the framework to ensure alignment with postBrexit regulatory objectives, but the core principles of the 1997 Regulations remain intact.
