Corporate analysis: The Takeover Panel has ruled that following the completion of the acquisition by Disney of Twenty-First Century Fox, Disney will be required to make a mandatory offer for Sky plc pursuant to Rule 9.1 of the Takeover Code. The ruling is an example of the so-called ‘chain principle’ under the Code. Original news The Takeover Panel (Panel) has issued a ruling that following completion of the acquisition by The Walt Disney Company (‘Disney’) of Twenty-First Century Fox Inc. (Fox) (the ‘Acquisition’), Disney will be required to make a mandatory offer (‘Offer’) to the shareholders of Sky plc (‘Sky’) pursuant to Note 8 on Rule 9.1 of the Takeover Code (‘Code’) as a result of Fox’s stake of approximately 39% in Sky. The ruling is an example of the so-called ‘chain principle’ under the Code. What is the ‘chain principle’ and why did it apply here? The ‘chain principle’ is dealt with under Note 8 on Rule 9.1 of the Code. Under this principle, an obligation to make a mandatory offer can arise where a person acquires 50% or more of the voting rights of a company (which need not be a company to which the Code applies) and, as a result, acquires or consolidates control of another company to which the Code does apply by virtue of the first company's interest in that second company. For these purposes the person will be regarded as having acquired or consolidated control of the second company because the first company itself is interested, either directly or indirectly through intermediate companies, in a controlling block of shares in the second company, or is interested in shares which, when aggregated with those which the person or group is already interested in, secure or consolidate control of the second company. The Code only requires a so-called 'chain principle' bid to be made when the second company is of 'significance' to the potential offeror, which the Panel interprets as being when either: •the interest in shares which the first company has in the second company is 'significant' in relation to the first company, taking into account factors such as the assets, profits and market values of the respective companies (relative values of 50% or more normally being regarded as significant), or •securing control of the second company might reasonably be considered to be a significant purpose for the persons acquiring a controlling interest in the first company The Panel should always be consulted where there is a possibility that the chain principle might apply to a particular transaction. For further details, see Practice Note: Mandatory offers and Resource Note: Takeover Code—Rule 9—The mandatory offer and its terms. In its ruling the Panel said it considered that securing control of Sky might reasonably be considered to be a significant purpose of Disney’s acquiring control of Fox and that therefore Disney should be required to make a mandatory offer following completion of the acquisition. What price must the mandatory offer be made at? The Panel further ruled that the Offer must be at £10.75 in cash for each ordinary share in Sky. The basis for this ruling was: •Note 8 on Rule 9.1 of the Code does not make provision for the price at which an offer made pursuant to that Note must be made •Rule 9.5 of the Code provides that an offer made under Rule 9.1 must be in cash (or accompanied by a cash alternative) at not less than the highest price paid by the offeror or its concert parties for any interest in offeree shares during the 12 months prior to the announcement of the offer. In this case, there had been no announcement by Disney of an offer for Sky. Nevertheless, the Panel considered that, in applying Rule 9.5, it was appropriate to take into account the acquisition of any interests in Sky shares in the 12 months prior to the announcement of the Acquisition. However, neither Disney nor its concert parties had acquired any interests in Sky shares during this period or subsequently •in these circumstances, the Panel determined that the Offer should be made at the price per share attributed by Disney to Fox’s shareholding of approximately 39% of the ordinary shares in Sky in connection with the Acquisition •each of Disney and Fox had informed the Panel that, in connection with the Acquisition, it attributed a price of £10.75 per ordinary share to the Fox shareholding in Sky; the Panel reviewed certain internal and external valuation materials that had been prepared in connection with the Acquisition and was satisfied that these supported the assertion that a price of £10.75 per ordinary share was appropriate Each of Disney, Fox and Sky accepted the rulings.