What was the background?
On 12 January 2018, GKN plc (GKN) announced that it had received a preliminary and unsolicited approach from Melrose Industries plc (Melrose) to acquire GKN. The GKN board unanimously rejected the offer, having concluded that the proposal was opportunistic and fundamentally undervalued the company and its prospects. Following discussions with GKN shareholders, Melrose issued a firm intention announcement on 17 January 2018, structured by way of a contractual offer with the consideration comprising cash and shares.
As GKN operated in the defence sector, the acquisition was conditional upon, among other things, certain regulatory approvals being received from US, German and French regulatory bodies (Defence Conditions).
What concession had the Panel granted?
Under Rule 31.7 of the City Code on Takeovers and Mergers (Code), except with the consent of the Panel, all conditions to an offer must be fulfilled or the offer must lapse within 21 days of the first closing date or of the date the offer becomes or is declared unconditional as to acceptances, whichever is the later. The Panel’s consent will normally only be granted if the outstanding condition involves a material official authorisation or regulatory clearance relating to the offer and it had not been possible to obtain an extension under Rule 31.6 (the Day 60 rule).
Melrose’s firm offer announcement stated that the Panel had informed Melrose on an ex parte basis that it would permit the extension of the 21-day period referred to in Rule 31.7 of the City Code to provide further time for any outstanding Defence Conditions to be satisfied in the event that the Defence Conditions were not satisfied within 21 days of the first closing date or the date the offer became or was declared unconditional as to acceptances, whichever was the later.
Why did the Panel withdraw the concession?
Following the making of its firm offer announcement, Melrose had up to 28 days within which to issue its offer document. Melrose therefore had until 14 February 2018 to issue its offer document, but chose to publish it on 1 February 2018. Following the changes to the Code introduced in January, this was the earliest date on which Melrose was permitted to publish its offer document without the consent of the GKN board.
Melrose’s offer document stated that the Panel’s concession was predicated on Melrose taking the full 28 days allowed under the Code to post the offer document. As the offer document had been published on an expedited basis, the Panel decided to withdraw the guidance communicated to Melrose at the time of the firm offer announcement. The Panel informed Melrose that any request for an extension under Rule 31.7 of the Code would need to be considered in light of the circumstances prevailing at the time.
What are the implications of the decision?
In its offer document, Melrose indicated that its contact with the relevant agencies had been positive and consequently Melrose continued to believe that it would be able to obtain the relevant clearances within the parameters permitted by the Code timetable. It is clear from the offer document that Melrose’s advisers were in close contact with the Panel and the issue illustrates the importance of advisers consulting early with the Panel on any cases of doubt concerning the operation of the Code.
Copies of the Melrose firm offer announcement, offer document and other document are available to download using our Market Tracker tool, found on the Key Resources tab on the Corporate homepage.
Commenting on the transaction, Patrick Sarch (Partner, White & Case and Co-head of Global Financial Institutions Industry Group) says:
“The Panel has been very focused on the timing of hostile situations recently. It has been exploring new means of balancing the siege principle (protecting targets from prolonged attack) with allowing a sufficiently free market to operate so as to allow a bidder to put a deliverable proposition to shareholders for their ultimate decision. The rulings in this situation show the Panel balancing the parties’ interests in the light of arguments from both sides, with the result that Melrose was granted sufficient flexibility to be able to launch, but without having its cake and eating it by extending the overall timetable more than necessary which would have been potentially to the detriment of GKN. This is exactly the kind of dynamic, tailored regulation of real deals which the Panel does extremely well.”