Takeover Panel rules that no reduction in price is allowed even after Fukushima nuclear disaster changes the economics of the deal
CGNPC Uranium Resources Co., Ltd (CGNPC) is a state-owned enterprise in the People’s Republic of China with a “strategy to support development of important new sources of natural uranium supply”.
On 7 March 2011 it was announced that Kalahari and CGNPC were in talks regarding a possible recommended cash offer by CGNPC for Kalahari at a price of 290p per share. Any offer would be governed by the terms of the Takeover Code (the Code).
On 11 March 2011 the Japanese tsunami severely damaged the Fukushima nuclear reactor. The resulting concerns about the future viability of nuclear power generation lead to fall in the worldwide price of uranium.
Attempt to change terms of the offer
On 3 May 2011 Kalahari announced that, following discussions between itself and CGNPC, the two parties had approached the Panel Executive of the Takeover Panel regarding a proposed reduction of the price of the possible offer to 270 pence per Kalahari share.
The Panel Executive ruled that such a reduction in the proposed offer price would not be permitted, even with the consent of Kalahari. This is because Rule 2.4(c) of the Code requires that:
“unless it [i.e. CGNPC] reserved the right not to be so bound at the time the statement was made….where the statement [i.e. the statement made on 7 March 2011] concerned relates to the price of a possible offer…any offer made by the potential offeror for the offeree company will be required to be made on the same or better terms”.
Note 5 to Rule 2.4(c) expands on this:
“Except with the consent of the Panel, where a potential offeror has referred in a statement subject to Rule 2.4(c) to the level of consideration to be paid if an offer is made, that potential offeror will not be allowed subsequently to make an offer for the offeree company at a lower level of consideration unless there has occurred an event which the potential offeror specified in the statement as an event which would enable it to set aside the level of consideration referred to.”
CGNPC and Kalahari chose not to reserve this right to change the terms of the possible offer in the 7 March 2011 announcement, and so the Panel Executive ruled that any offer by CGNPC would have to be made at the 290p per share price stated in that announcement.
Appeal by Kalahari
Kalahari appealed to the Panel Hearings Committee against this ruling and the appeal was heard on 10 May 2011. The Hearings Committee confirmed the Panel Executive’s ruling that, given that the parties had not reserved the right to change the terms of the possible offer, no reduction of price was permitted under the provisions of the Code.
A summary (the Summary) of the terms of the Implementation Agreement entered into between Kalahari and CGNPC on 7 March 2011 can be read here. The Summary states that a break fee of £7.5 million shall be payable by CGNPC if, amongst other terms, CGNPC has not released a Rule 2.5 statement of a firm intention to make an offer by 3 May 2011. The statement made by Kalahari on 3 May 2011 following the Panel Executive ruling says that:
“The parties [i.e. Kalahari and CGNPC] have entered into a deed of variation amending certain terms of the Implementation Agreement entered into on 7 March, including the postponement to 17 June 2011 of the date by which an announcement of a firm intention to make an offer must be made. This deed of variation is conditional upon a successful appeal of the Panel Executive’s ruling.”
The parties have not yet responded to their unsuccessful appeal of the Panel Executive’s ruling. Following the Hearing Committee’s rejection of their appeal, Kalahari has the right to appeal to the Takeover Appeal Board.
UPDATE: CGNPC has now withdrawn its offer. Here is CGNPC’s withdrawal announcement and here is Kalahari’s response. Kalahari has decided not to require payment of the £7.5 million break fee, for the reasons set out in this announcement.
UPDATE 26 May 2011: The Hearings Committee has released a statement dated 25 May 2011 (the Statement) setting out its detailed reasons for confirming the Panel Executive’s ruling and turning down Kalahari’s appeal. The main point of interest in the Statement is its discussion of the circumstances in which the Panel may give its consent to a lower offer – that consent being required by Note 5 to Rule 2.4(c). That consent may only be given in “wholly exceptional” circumstances, and the Statement sets out the Hearing Committee’s reasoning as to why the Fukushima incident and its impact on CGNPC’s offer did not meet this test.
The Statement can be read here. Kalahari has decided not to make an appeal to the Takeover Appeal Board.
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