Are mandatory offers always mandatory?

For example, assume Company A has a controlling interest in Listco B. Company C then acquires all the shares in Company A (but acquires no shares directly in Listco B). Assume too that for various reasons a mandatory offer is not triggered under the related party rules in regulation 83 of the Companies Regulations nor under the pyramid rules in regulation 85 of the Companies Regulations.

Section 123 applies where:

“(2) …

(a)   either—

(i)    …; or

(ii)    a person acting alone has, or two or more related or inter-related persons, or two or more persons acting in concert, have, acquired a beneficial interest in voting rights attached to any securities issued by a regulated company;

(b)   …; and

(c)    as a result of that acquisition, together with any other securities of the company already held by the person or persons contemplated in paragraph (a) (ii), they are able to exercise at least the prescribed percentage of all the voting rights attached to securities of that company.”

Company C will not acquire a direct interest in Listco B as a result of the transaction. Instead, Company C will acquire an indirect controlling interest in Listco B, as a result of acquiring 100% of Company A. Whilst the position in respect of an acquisition of direct control in a regulated company seems to be quite clear, a murky and uncertain one exists in respect of an acquisition of indirect control in a regulated company.

A key question is whether post the implementation of the transaction, Company C (as the new sole shareholder of Company A) will hold a “beneficial interest” in Listco B for the purpose of section 123.

“Beneficial interest” is defined in section 1 of the Companies Act as:

“when used in relation to a company’s securities, means the right or entitlement of a person, through ownership, agreement, relationship or otherwise, alone or together with another person to—

(d)   receive or participate in any distribution in respect of the company’s securities;

(e)   exercise or cause to be exercised, in the ordinary course, any or all of the rights attaching to the company’s securities; or

(f)     dispose or direct the disposition of the company’s securities, or any part of a distribution in respect of the securities...”

It is clear that after the transaction, Company A will remain the registered and beneficial owner of the Listco B shares, and the holder of the voting rights attached thereto.

There are cogent arguments that could be made in support of a contention that for purposes of section 123, Company C should be considered to hold a beneficial interest in the Listco B shares held by Company A – mainly in that effectively, Company C has the same level of control as a direct shareholder. However, there are also cogent arguments to the contrary – that Company C should not for purposes of section 123 be considered to have a “beneficial interest” in the Listco B shares, merely by virtue of the fact that Company A is its wholly-owned subsidiary and that it is therefore able to control the constitution of its board. After all, Company A is a separate juristic person and its board must act in the best interests of Company A when exercising the voting rights attached to the Listco B shares.

In any event, even if Company C was considered to hold such a beneficial interest in Listco B, such beneficial interest should not confer on Company C the actual legal ability to exercise the voting rights attaching to the Listco B shares, as envisaged in section 123(2)(a)(c).

Other jurisdictions, such as the UK, have specific guidance on this aspect of indirect acquisitions of control, where it is referred to and dealt with as the “chain principle”. It is hoped that clarity will be brought to the situation in our takeover law by future amendment to the Companies Act and/or the regulations thereunder.