Cleary Gottlieb | Auctions in UK Public Bids

When a competitive situation involving two or more competing bidders for a UK-listed target continues to subsist in the later stages of the bid timetable¹, the Takeover Panel will intervene to organise an auction.² The purpose of the auction is not to select a winning bidder, but rather to produce best and final bids from each bidder that the target shareholders can then choose between. A default auction procedure is set out in the Takeover Code, but the target and the competing bidders can and often do agree to use a bespoke auction procedure.

While auctions have been historically rare, high demand for UK-listed targets in 2021 has led to many competitive situations.³ This has resulted in an unprecedented number of auctions this year.

The Default Auction Procedure

The Takeover Panel first established a default auction procedure in 2002, which was last revised in 2014 and is now set out in Appendix 8 to the Takeover Code. This provides for an open auction with daily transparent bidding over a maximum of five business days until one of the bidders fails to announce a revised bid.

Ground Rules

The Auction

Under Appendix 8, the auction itself takes place over up to 5 consecutive business days, ending either: (i) on the first day that no revised offer is announced; or (ii) at 5:00 pm on the fifth business day, following the announcement of each bidder’s final round bid:

Either or both of the competing bidders may announce a revised offer on Day 1. Offers are submitted blind and announced simultaneously. If neither bids, the auction ends.

Alternative bidding on these days. A bidder may only announce a revised offer on any of Days 2, 3 and 4 if the other bidder has announced a revised offer the day before. If neither bids, the auction ends.

Both competing bidders may announce a revised offer in the fifth and final round. Final round offers may be conditional on the other competing bidder also making an offer in the final round (avoiding a situation where a bidder might bid against itself).

Bespoke Auction Procedures

Instead of the default procedure, the Takeover Panel will consider applying any alternative auction procedure which is agreed between competing bidders, the target board and the Takeover Panel. Indeed, the Appendix 8 rules have a number of drawbacks (see below), were written as a default backstop to encourage parties to agree a bespoke procedure and do not necessarily represent how the Takeover Panel thinks an auction should be run.

In practice, the default procedure is therefore often modified or replaced in its entirety by a bespoke auction procedure: only 2 out of 7 auctions in the last 10 years have used the Appendix 8 procedure without modifications.

The process of agreeing a bespoke auction procedure is highly complex and time consuming. The process is led by the target and its advisors, but requires the agreement of each competing bidder (as well as the Takeover Panel) and in practice involves each party engaging in significant game theorising to assess the relatively advantages and disadvantages of different aspects of bespoke auction rules given each party’s individual position and perspective.

We set out below some of the most common variations to the Appendix 8 procedure and discuss how competing bidders might approach such variations depending on their respective positions:

Bespoke Auction Procedures

We set out below some of the most common variations to the Appendix 8 procedure and discuss how competing bidders might approach such variations depending on their respective positions: