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Takeovers Code – Lock-Up Agreements / Shareholders’ Agreements – are the parties ‘associates’?

by Stephen on April 30th, 2015


In the latest edition of the Takeovers Panel bulletin (Code Word 39) the Panel has signalled a change in stance over the status of Lock-Up Agreements – and whether the entry into such an agreement automatically rendered the parties ‘associates’ for the purposes of the Takeovers Code.

As a result of the change of stance, the Panel has indicated that it will now consider Lock-Up Agreements on a case-by-case basis to determine whether parties are ‘associates’ (which corresponds to the Panel’s treatment of Shareholders’ Agreements).

At the same time, the Panel has also provided some broad guidance to assist the market in deciding whether under the circumstances an associate relationship may exist between the parties to a Lock-Up or Shareholders’ Agreement.


The significance of a party to a Lock-Up Agreement or a Shareholders’ Agreement triggering ‘associate’ status for the purposes of the Takeovers Code is that the control of voting rights for the purposes of the Code is examined on the basis of holding and control of the relevant person and their associates. As a result, the 20% threshold under the fundamental rule in Code looks at whether the relevant person and their associates has increased their holding or control beyond that 20% threshold.

Rule 4 of the Code contains a comprehensive definition of ‘associate’ that extends to persons:

• acting jointly or in concert; or
• acting, or being accustomed to act, in accordance with the wishes of the other; and
• with a business relationship, personal relationship, or an ownership relationship such that they should, under the circumstances, be regarded as associates.

Lock-Up Agreements

A Lock-Up Agreement is a legal commitment by a shareholder in a Code company to accept a takeover offer.

Previously, the Panel’s position on Lock-Up Agreements was that the parties were likely to be ‘associates’ of each other for the purposes of the Code. This resulted from the Bridgecorp Capital Limited Determination (2004).

However, as a result of market feedback and its experience since Bridgecorp, the Panel says that it will now consider each agreement on a case-by-case basis. In making that announcement, the Panel has provided a non-exhaustive list of the factors that may be included in a Lock-Up Agreement without creating an ‘associate’ relationship under the circumstances, being:
• the agreement is a commercial arm’s length commitment (i.e. a straightforward agreement to make and accept a takeover offer and the parties are not acting jointly or in concert, but rather on opposite sides of the contract);
• the agreement does not go beyond making and accepting a takeover offer, and does not include ongoing covenants;
• there is no other ongoing relationship of the parties (i.e. the relationship ends when the shares are transferred in accordance with the takeover offer);
• the agreement expressly precludes control of voting rights passing to the offeror prior to the takeover offer becoming unconditional; and
• the agreement is short-term, lasting no longer than the settlement or lapsing of the takeover offer.

The Panel notes that, generally, in a Lock-Up Agreement the seller will wish to approve the terms on which the offer is made and any variations to the terms. The Panel accepts that “within reason” this is a necessary incident of a Lock-Up Agreement, but it will be a question of degree in each case as to whether the extent of the approval rights is such as to make the parties ‘associates’.

The Panel also noted that it accepts that the seller will wish to have certainty as to the essential terms on which the offer will be made, such as price, timetable and material conditions – and that provisions which seek to do no more than this are unlikely of themselves to make the parties ‘associates’.

Similarly, terms which secure a proportionate commercial benefit for all shareholders, such as making acceptance of the offer contingent on the target company paying a dividend or making a taxable bonus issue – are also unlikely to trigger ‘associate’ status.

However, the Panel cautions that, the more control a seller seeks to exert (particularly with terms or other arrangements which seek to exert influence over the behaviour of an offeror once an offer has been made) the more likely it is that the Panel may conclude that in the circumstances the parties are ‘associates’.

What are the consequences of not being associates?

The Panel helpfully list a number of consequences of entry into a Lock-Up Agreement and not triggering ‘associate’ status, being:

• the would-be offeror could acquire up to 20% of the voting rights after entry into the Lock-Up Agreement and in advance of actually making the takeover offer – and the other party’s voting rights would not need to be factored in to any calculation of compliance with the fundamental rule;
• it could potentially give the would-be offeror greater scope to make acquisitions during the offer period without breaching rule 36 of the Code; and
• it will be easier for an offeror to complete a takeover offer and the likelihood of shareholders having the right to object to the compulsory acquisition consideration will be lower.

Shareholders’ Agreements

The Panel’s view on Shareholders’ Agreements remains that the parties may be ‘associates’ – depending on the nature of the Shareholders’ Agreement and
the surrounding circumstances. However, the Panel has provided additional guidance to help determine whether or not an ‘associate’ relationship may exist, being:

• an agreement that merely contains terms relating to pre-emptive or drag/tag along rights and obligations is unlikely (on its own) to trigger ‘associate’ status;
• an agreement that contains terms relating to voting requirements or that gives certain shareholders specific rights, such as for appointment as directors, may trigger ‘associate’ status;
• whether the agreement applies to all or a select group of shareholders may also be relevant (with agreements for select groups or individuals increasing the likelihood of their being ‘associates’ of each other); and
• collateral arrangements or ongoing relationships outside of the Shareholders’ Agreement should be considered together with the agreement itself and (in aggregate) these may trigger ‘associate’ status.

The Panel also notes that terms of Shareholders’ Agreements can vary significantly and may relate to a time when the company had a small number of shareholders – and that the Panel has in the past granted an exemption to allow the parties to unwind an agreement in order to “dis-associate” themselves.

Concluding comments

The signal that the Panel has revised its view of Lock-Up Agreements arguably does little more than align the approach with that historically taken on Shareholders’ Agreements. That is, the Panel is more consistently seeking to assess whether ‘associate’ status is triggered by examining each agreement on a case-by-case basis according to whether it gives a party any ability to control the exercise of voting rights (or some of the other hallmarks of such control – such as director appointment rights).

However, whilst some of the Panel’s guidance may not trigger a sea-change in the case of the battle for control of a listed company – it does provide some much-needed clarity that may be useful in the case of strategic arrangements with unlisted Code companies such as those designed to achieve industry rationalisations in some sectors.

Further information

If you would like more information about any of the matters discussed in this note, please contact me.

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