Are poison pills finally coming to the UK?

February 2021 | PROFESSIONAL INSIGHT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

February 2021 Issue

US public companies have for many decades successfully deployed a wide range of defensive tactics (contractual or constitutional) to deter unwelcome takeover approaches. Furthermore, US institutional investors have invested in such companies, notwithstanding that these measures may ultimately deny shareholders the opportunity to obtain an attractive premium on a takeover.

The widespread use of takeover defences in the US has not been replicated in the UK. Most notably, a traditional shareholder rights plan, ubiquitous in modern US public company takeover defence, faces significant obstacles in the UK. In the UK, with the exception of the issue of golden shares to the government on the privatisation of former government-owned businesses, takeover defences that make a target unattractive to the bidder, or ‘poison pills’, have rarely been encountered or indeed countenanced by UK institutional investors.

In addition, the UK City Code on Takeovers and Mergers (Takeover Code) prohibits a target company, during an offer or when an offer is contemplated, from taking any action which might frustrate a takeover offer without the approval of its shareholders.

However, poison pills recently featured in two high profile UK deals in 2020.

The takeover of William Hill

‘Poison puts’ and similar provisions are often included in contractual arrangements that, intentionally or otherwise, have the effect of discouraging takeovers of public companies. These provisions are often found in debt instruments (particularly bond indentures) and joint venture arrangements. For example, bond indentures often provide noteholders with the right to require the borrower to repurchase their bonds (the ‘poison put’).

Joint venture arrangements often permit a counterparty to terminate the joint venture and may even require a significant buyout payment in connection therewith. While such arrangements generally have valid commercial purpose, these rights can make the acquisition of the public company significantly more expensive or otherwise unattractive to potential suitors.

On the takeover of William Hill PLC, both Caesars Entertainment, Inc. (a major gaming operator) and Apollo (a leading private equity sponsor) had made takeover approaches.

Caesars enjoyed a pre-existing US-based joint venture with William Hill that gave it a significant strategic advantage in its takeover efforts. Specifically, the terms of the joint venture agreement (entered into in 2018) allowed either party to terminate the joint venture if the other party were taken over by a limited list of named competitors.

This change of control feature had the practical effect that if MGM Resorts (a Las Vegas competitor of Caesars) was to acquire William Hill, Caesars would be entitled to terminate its joint venture with William Hill, ensuring that its competitor would not obtain access to the software, know-how and brands that the joint venture was using in Caesars’ casinos and online. By narrowing the scope of the joint venture agreement’s takeover defence to a specified list of competitors, there is a rational commercial justification for its enforceability beyond the naked obstruction of any takeover of William Hill whatsoever.

Shortly after the announcement by William Hill that it had received takeover approaches from both Caesars and Apollo, Caesars announced that it was exercising its right under the joint venture agreement with William Hill to add Apollo to the list of entities that Caesars would regard as a competitor. Therefore, were Apollo to acquire William Hill, Caesars would have the contractual right to terminate its US joint venture with William Hill. Caesars made this election even though Apollo is, notwithstanding that it has had interests in various casinos and gaming operators, not believed to be a significant competitor of Caesars.

Faced with the prospect of losing US market access and future revenues from the US joint venture were Apollo to acquire William Hill, Apollo announced that it had no intention of making an offer for William Hill, thereby allowing Caesars to acquire William Hill on an uncontested basis.

Special share for the founder of The Hut Group

In the US, dual-class stock structures have seen a renaissance in the last five years, being adopted more frequently in founder-led technology businesses based in Silicon Valley and not just traditional media companies based in New York. Typically, the holder will enjoy a ‘high vote’ class to maintain control over shareholder resolutions. These may be a class with 10 or more votes per share (as opposed to the ‘low vote’ class with one or no votes per share) or a specified percentage of the total voting power of the company’s stock. These special shares often also afford the holder special consent rights, most commonly over mergers and other forms of takeovers.

We note that over the years the voting guidelines of Institutional Shareholder Services and other proxy advisers, the Council of Institutional Investors and the voting policies of many US-based institutional investors themselves often disfavour dual-class voting structures without a clear expiration date (or, for some, in any form). Nevertheless, these structures remain popular in the US, often representing approximately 20 percent. of IPOs in any given year.

On the recent £5bn initial public offering (IPO) of The Hut Group in London, the founder shareholder was issued with a special share – if there is a change of control of the company within three years of the IPO, the special share automatically affords the founder enough votes to control the outcome of shareholder resolutions. The special share therefore allows the founder to deter unwelcome takeovers for three years. The UK Takeover Panel confirmed that the issue of the special share and the exercise by the founder of his voting rights following a change of control will not trigger an obligation on the holder to make a general offer to shareholders pursuant to Rule 9 of the Takeover Code.

Observations

A contractual provision put in place to protect William Hill’s commercial interests should its joint venture partner be the subject of an unwelcome takeover has in practice had potentially unintended consequences. By virtue of Caesars declaring that Apollo is a competitor, Apollo was ultimately unwilling to proceed with an offer for William Hill, thus denying William Hill shareholders the prospect of a higher take out price following a protracted bidding war for the company. While the William Hill joint venture arrangement is obviously fact specific, companies should be mindful before agreeing to contractual poison pills which, over the longer term, may give rise to unintended consequences. Will history repeat itself? It was recently announced that MGM was looking to bid for Entain PLC (GVC). Time will tell whether the US joint venture arrangements between MGM and Entain might also have unintended consequences for Entain and its shareholders in the context of a possible takeover of Entain.

Even though The Hut Group’s IPO took place in an otherwise weak UK IPO market, the fact that investors had strong appetite to invest in the company notwithstanding the existence of the special share is certainly noteworthy. Investors have effectively granted the founder the right to determine the outcome of any takeover approaches for a three-year period. Such poison pills have been commonplace in the US for decades, but importantly without any time limitation being imposed on the founder’s right to exercise such control. In early January, the London Stock Exchange joined City and other business groups in urging the government to overhaul the rules for company listings in the UK in order to attract fast growth companies, including supporting dual class share structures.

Going forward, we anticipate that other companies listing in London which are controlled by a founder will seek to replicate such takeover defences, and that UK institutional investors will increasingly be prepared to countenance such arrangements. Over time, we also anticipate that UK investors will be prepared to countenance the use of US style ‘evergreen’ poison pills where there is no time limitation on the exercise of the poison pill. It has taken the UK decades to catch up with US practice, but finally we are now witnessing US style poison pills in the UK market.

Nigel Stacey is a partner, Sian Williams is special counsel and SJ Beaumont is an associate at Baker Botts. Mr Stacey can be contacted on +44 (0)20 7726 3436 or by email: nigel.stacey@bakerbotts.com. Ms Williams can be contacted on +44 (0)20 7726 3465 or by email: sian.williams@bakerbotts.com. Ms Beaumont can be contacted on +44 (0)20 7726 3443 or by email: sarah.beaumont@bakerbotts.com.

Nigel Stacey, Sian Williams and SJ Beaumont

Baker Botts