What is a “Mandatory Bid”?
In M&A, a Mandatory Bid, or Mandatory Offer is a bid or an offer made by a company or any person acting alone or in collaboration with the “Bidder” acquiring shares of a “Target” exceeding a certain shareholding threshold. As part of a corporate takeover process, the Mandatory Bid is governed by securities laws, regulations, and stock exchange rules. In the UK, corporate takeovers are regulated by The City Code on Takeovers and Mergers (the “Takeover Code”).
In a Mandatory Bid, any person or entity, whether acting alone or in concert, who can exercise at least a certain threshold (eg. 30%) of the voting rights at a general meeting of shareholders must make a bid or offer to the remaining shareholders a buy-out of all the minority shares in the company. The bidder must offer shareholders of the target company the ‘equitable price’ for their shares.
Key Learning Points
Threshold – Thresholds for mandatory bids vary between countries. In most countries, such as the United Kingdom, Hong Kong, and Germany, the threshold is 30%. There are no provisions for mandatory bids in the United States.
Purposes – the mandatory bid is used to protect minority shareholders in situations where the control of the target company has changed. A certain percentage of holding, eg. 30% held by one shareholder, although not giving the shareholder a formal control of the company, is sufficient to give effective control. When the control is being transferred, the share price of the company might be affected adversely, and thus the interest of the minority shareholders is affected. Mandatory bid gives the minority shareholders the right to sell their shares to the new controlling shareholder.
Price – under Rule 9 of the Takeover Code, a mandatory bid is required to be made in cash (or be accompanied by a cash alternative) and at the highest price paid by the bidder or any concert party for any interest in shares of the relevant class during the 12 months prior to the announcement of the mandatory bid.
Waiver – There are several circumstances in which the regulator Takeover Panel may grant a waiver of Mandatory Bid. For example, the waiver could be granted when the formal whitewash (see below) procedure applies, or in situations of rescue operations where a company is in such a serious financial position that it can only be saved by an urgent issue of new shares or where shares or other securities are charged as security for a loan and, as a result of enforcement of the security.
Whitewash – Under the UK Takeover Code, the obligation for a Mandatory Bid may be waived where more than 50% of the shareholders who are independent of the transaction pass an ordinary resolution at a general meeting approving the waiver. This is known as the whitewash procedure. The Whitewash procedure is typically used when increases in shareholding of a person result solely from the issue of the particular shares, for example, consideration shares issued on an acquisition.
Example of a Mandatory Bid
On 21 January 2022, Tibergest PTE Ltd (the “Bidder”) announced its intention to make a mandatory cash bid for all of the issued and to be issued Shares in Photo-Me International PLC (the “Target”) not already held by the Bidder. On 15 February 2022, the Bidder published and sent the offer document containing the full terms and conditions of the unrecommended Offer (the “Offer Document”) to the Shareholders of the Target. The Bid offer was open for acceptance until the Unconditional Date, which is 8 March 2022.
The Bidder is a company wholly-owned by the CEO of the target. Prior to the Mandatory Bid being made, the Bidder and the CEO held in aggregate 108,837,410 of the Target company, representing approximately 28.8% of total equity. The Bidder agreed to acquire 29,111,186 shares of the target representing approximately 7.7% at a price of 70p share from an existing shareholder of the target. As a result, the Bidder and the CEO would hold 137,948,596 shares in aggregate, representing approximately 36.5%. Under Rule 9 of the Takeover Code, the Bidder is therefore required to make a mandatory cash offer to purchase all the target’s shares not already held by the bidder.
- The offer price was set at a discount of 8 percent to the Closing Price of 75.6p on 20 January 2022, the last business day prior to the date of announcement
- The offer price represented a premium of approximately 15.9 percent to the volume-weighted average price of 64.7p for the three months ended on 20 January 2022
Independent Directors Advice
The Independent Directors of the target company advised that Bid Price represents a very small discount to the closing price on 20 January 2022 and therefore advised the shareholders to consider carefully. The Mandatory Bid was unrecommended by the independent directors.
The Mandatory Bid becomes unconditional if valid acceptances of the Bid are received as the Bidder may carry more than 50 percent. of Target.
The outcome of the Mandatory Bid
The daily update was announced in relation to the acceptances being received by the Bidder.
On 8 March, the last day of the Mandatory Bid open period, the Bidder did not receive sufficient acceptances resulting in over 50% holding, and therefore the Mandatory Bid lapsed.
The Mandatory Bid rules originated in the UK and have now been adopted throughout the world. It protects the minority shareholders by preventing inefficient control transfers and helps facilitate transfers of the control to the most efficient bidders in multi-bidder settings.
Download the accompanying excel files to test your understanding of mandatory bids.