A recent piece published in the FT - Elon Musk’s new moonshot: toppling corporate law - covered the latest developments in his bid for Twitter, Inc. The terms of the Agreement and Plan of Merger (entered into by and among X Holdings I, Inc. (Parent), X Holdings II, Inc. (Acquisition Sub) and Twitter, Inc. on 25 April, 2022) will now be reviewed carefully by the Chancery Court in Delaware. Whatever the outcome the PR will no doubt be eye-catching.
In the US the outcome is in the hands of the courts, but what would happen if this bid was subject to the UK Takeover Code?
The answer seems straightforward. The Takeover Panel would require Elon Musk and the companies formed to make the bid (in this case the Parent and the Acquisition Sub and Elon Musk in his capacity as an equity investor in those companies) to proceed with the bid and send an offer document to shareholders in Twitter, Inc. within 28 days of the announcement of a firm intention to make an offer (Rule 24.1).
Rule 2.7(a) of the Takeover Code makes it clear that a bidder should announce a firm intention to make an offer only after the most careful and responsible consideration and when the bidder has every reason to believe that it can and will continue to be able to implement the offer.
Rule 2.7(b) covers this specific situation and states that following an announcement of a firm intention to make an offer, the bidder must proceed to make the offer unless, in accordance with the provisions of Rule 13.5, it is permitted to invoke a pre-condition to the making of the offer or would be permitted to invoke a condition to the offer if the offer were made.
However, it seems highly unlikely that the Acquisition Sub would be permitted to invoke a condition to its bid. While the Takeover Code permits bidders to include conditions or preconditions, an offer must not normally be subject to conditions or pre-conditions which depend solely on subjective judgements by the directors of the bidder or the target company or the fulfilment of which is in their control. Importantly, the Takeover Code contains constraints on the ability of bidders to invoke conditions and pre-conditions.
A bidder can only invoke a condition or pre-condition with the consent of the Panel although there are some limited exceptions to this general rule. The Panel will normally only give its consent if the circumstances which give rise to the right to invoke the condition or pre-condition are of material significance to the bidder in the context of the bid. This will be judged by reference to the facts of each case at the time that the relevant circumstances arise.
While no "material adverse change" conditions are often included in announcements and offer documents, the Panel has confirmed that:
- the appropriate test for the invocation of a condition is whether the relevant circumstances upon which the bidder is seeking to rely are of material significance to it in the context of the bid;
- whether this test is satisfied will depend on the bidder demonstrating that the relevant circumstances are of very considerable significance striking at the heart of the purpose of the transaction; and
- whilst the standard required to invoke a material adverse change condition is therefore a high one, the test does not require the bidder to demonstrate frustration in the legal sense.
If you would like to discuss the UK Takeover Code please contact Nick Graves, Rupert Weston, Chris Godfrey or another member of the Burges Salmon Corporate Group.