Points of practice: accelerated whitewashes
On 8 January 2018 the Executive's practice known colloquially as the "accelerated whitewash" procedure was codified in a new sub-paragraph (c) to note 5 of the Notes on Dispensations from Rule 9 of the Code. The procedure is particularly useful for smaller companies where the cost of a formal whitewash process might be disproportionate.
In this article, we outline some points of practice in relation to the accelerated procedure which is relevant to situations where a waiver is needed from an obligation to make a mandatory offer under Rule 9 as a result of the issue of new securities as consideration for an acquisition or a cash subscription.
Sub-paragraph (c) to note 5 of the Notes on Dispensations from Rule 9 of the Code provides that the Panel will consider waiving the requirement for a general offer under Rule 9 where:
(c) in the case of an issue of new securities, independent shareholders holding shares carrying more than 50% of the voting rights of the company which would be capable of being cast on a "whitewash" resolution (see Note 1) confirm in writing that they approve the proposed waiver and would vote in favour of any resolution to that effect at the general meeting."
As the introductory wording to note 5 implies, the accelerated whitewash waiver is a discretionary waiver and the Panel will need to be convinced of the merits of a waiver on a case by case basis; issuers should not assume it will always be available.
Indeed, the Panel's starting position is that a circular and actual vote of independent shareholders is the preferred approach. This is because an accelerated whitewash waiver, if granted, generally deprives shareholders of the opportunity for:
(a) any other person to make an alternative proposal to the issuer conditional on a whitewash resolution not being approved by independent shareholders and;
(b) other shareholders to make their views on the proposed transaction known. In addition, there will be no requirement for the issuer either
(i) to obtain and make known to its shareholders competent independent advice obtained in accordance with Rule 3 of the Code on the proposed transaction and the waiver of the proposed controller's obligation to make a Rule 9 offer or;
(ii) to publish a circular to shareholders of the issuer in compliance with Appendix 1 of the Code in connection with this matter.
In light of the above, the form of the written waiver from independent shareholders has to be in a form approved by the Panel and must explicitly acknowledge the matters set out above. It must also formally consent to the granting of the waiver by the Panel, include confirmation that the independent shareholder would vote in favour of a whitewash resolution were one put to independent shareholders at a general meeting, and confirm that it will not sell, transfer, pledge, charge, or grant any option or other right over, or create any encumbrance over, or otherwise dispose of its shares in the company until after the conclusion of any proposed general meeting required to approve matters relating to the proposed transaction.
It is also worth focussing on the concept of "independent shareholders". The requirement here is that the shareholders be independent not of the person who, but for the waiver would incur a Rule 9 obligation, but of the proposed transaction.
So, for example, if a placing would take one particular shareholder and their concert parties through 30% of voting rights (or if already holding more than 30% but less than 50% would increase their percentage holding), other placees would not constitute independent shareholders and would therefore not be able to participate in any whitewash approval process, whether accelerated or conventional.
Finally, the Panel will always be concerned to ensure equality of treatment for all shareholders. The Panel sees a key part of its role as protecting the interests of retail and smaller shareholders. Retail shareholders will not ordinarily be consulted on a proposed accelerated whitewash process and they will not have the opportunity to vote on a whitewash resolution in such circumstances – indeed, they will likely only become aware of the accelerated whitewash once it has been finalised.
It is, therefore, imperative to the Panel that all shareholders are treated equally in any equity fundraise that is to take place at the same time as (or creates the need for) a whitewash procedure. Any failure to afford such equality to all shareholders will result in the Panel viewing those shareholders treated more favourably than others (in terms of ability to participate in an equity fundraise) as not being "independent" for the purposes of the whitewash approval process.
As an example, participants in a placing will only be considered by the Panel to be independent shareholders if all shareholders not offered a placing participation are provided with the opportunity (e.g. by way of an open offer) to enjoy full pre-emption and have the chance to stand their corner and avoid disproportionate dilution.
For more information, please contact Mark Howard.
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