Enforcement of security over shares may trigger the obligation to make a mandatory offer

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Rule 9.1 of the Takeover Code provides that, except with the consent of the Takeover Panel, when any person, together with any concert party, is interested in shares which carry not less than 30 per cent. of the voting rights of a company but does not hold shares carrying more than 50 per cent. of such voting rights and such person, or any concert party, acquires an interest in any other shares which increases the percentage of shares carrying voting rights in which he is interested, such person must make a mandatory cash offer for the company.

The Takeover Code goes on to provide, in Note 2 of the Notes on Dispensations from Rule 9, that where shares are charged as security for a loan and, as a result of enforcement, the lender would otherwise become obliged to make a mandatory offer under Rule 9, the Takeover Panel will not normally require such an offer if sufficient interests in shares are disposed of within a limited period to persons unconnected with such lender so as to reduce the percentage of shares with voting rights held by the lender and any concert party to the level they were before the enforcement of the loan.

The Takeover Panel has recently provided an illustration of its approach to Rule 9 dispensations where the requirement to make a mandatory offer would arise from the enforcement of security over shares by a concert party of the existing 30 per cent shareholder. The shareholder, Mercurius, held just over 30 per cent of the shares with voting rights in OIM, a company to which the Takeover Code applied. Mercurius assigned the benefit of a loan, secured over shares in OIM, to a third party, Budeste. Budeste enforced its security, thereby acquiring a stake of just under 15 per cent in OIM. It later reduced its shareholding to just under 13 per cent.

The Panel ruled that Mercurius and Budeste were acting in concert at all material times. However, in line with Note 2 of the Notes on Dispensations from Rule 9, the Panel waived the requirement for a mandatory offer. Instead, it ruled that the aggregate shareholding of Mercurius and Budeste must be reduced to 30.13 per cent. – the size of Mercurius’ shareholding before Budeste enforced its security.

Pending such disposal, the Panel also ruled that the aggregate number of votes that could be cast by Mercurius and Budeste at a general meeting of OIM was 30.13 per cent. of the votes exercisable at such meeting.

WM comment
The case is an interesting illustration of the approach the Takeover Panel will take where a concert party of an existing 30 per cent shareholder enforces its security over shares in a public company.