Public company change of control series: Contractual offer

The Takeover Code is a set of binding rules and general principles which govern how company takeovers and mergers are administered and executed in the UK.

In the first of our Public company change of control series which examines options under the Takeover Code to acquire control of a public company, we explored a Part 26 Scheme of Arrangement. In part 2, we provide a guide to a Contractual Offer.

What is a Contractual Offer?

A Contractual Offer is a bidder’s formal proposal to acquire shares directly from target shareholders. It is made on the terms set out in an offer document and is subject to the Rules of the Takeover Code, which are designed to ensure fairness, transparency and equal treatment of shareholders.

It can provide a flexible and well-regulated route for bidders seeking to acquire a UK quoted company.

The process can be quicker and more flexible than a court‑sanctioned scheme of arrangement (which requires shareholder approval at a court-convened meeting and subsequent court sanction), particularly in recommended bids.

Contractual offer for recommended bids and hostile bids

A Contractual Offer is suitable for both recommended bids (where the target board supports the offer and encourages acceptance by shareholders) and hostile bids (the bidder proceeds without the support of the target board). It can be used in hostile situations because it does not require the cooperation of the target board (the bidder may publish the offer document directly to shareholders without board recommendation).

The process for a Contractual Offer

1. Pre-announcement:

• The bidder announces a firm intention to make an offer (under Rule 2.7 of the Takeover Code), triggering the formal offer period.

2. Offer document:

• The bidder must publish a detailed offer document (within 28 Days of announcing), setting out: full terms and conditions of the offer; the consideration offered; financing confirmations; and the bidder’s intentions for the target and its employees.

3. Response to a bid:
   • In the event of a hostile bid, the target board must publish a defence document within 14 days of the offer document being posted.
   • For a recommended bid, the target shareholders must be given a period of at least 21 days from the date of posting of the offer document to consider, and if they wish, to accept the offer either electronically or by returning a form of acceptance.
4. Acceptance terms:
   • Under a Contractual Offer, the bidder requires acceptances of more than 50% of the target’s voting share capital (unless the bidder opts for a higher acceptance condition, such as 75%) to obtain control and declare the offer unconditional as to acceptances.
   • However, in order to compulsorily acquire the shares of any shareholder who has not accepted the offer, the bidder must have acquired or agreed to acquire not less than 90% in value of the shares to which the offer relates and not less than 90% of the voting rights carried by those shares.
5. “Squeeze out” rights:
   • A “squeeze out” allows a bidder who has acquired a very high percentage of a target company’s shares to force the remaining minority shareholders to sell their shares.
   • This right of "squeeze-out" is conferred by the Companies Act 2006, and the bidder must exercise it within three months of the date on which the 90% threshold is first reached or six months of the offer opening, whichever is later.
6. Timetable adherence:
   • Throughout the offer period, the bidder must keep the market updated on acceptance levels at the intervals prescribed by the Takeover Code.
   • The bidder must comply with strict rules on timetable, revision of the offer, competing offers, and shareholder withdrawal rights.
   • In particular, a shareholder who has accepted the offer may withdraw that acceptance after 21 days from the first closing date, if the offer has not by then become unconditional as to acceptances (or the timetable has not been suspended).
   • Once the offer becomes or is declared unconditional as to acceptances, it must remain open for acceptance for at least a further 14 days, allowing remaining shareholders the opportunity to accept on the same terms.

In the final instalment of our Public company change of control series, we examine the key differences between a Part 26 Scheme of Arrangement and a Contractual Offer, when acquiring control of a quoted company under the UK Takeover Code.

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