The Takeover Panel (Panel) has recently published public consultation paper 2015/1 (PCP). The PCP proposes amendments to the Takeover Code (Code) in relation to the treatment of dividends paid by a target company to its shareholders. The amendments are intended to clarify the application of existing provisions of the Code and ensure greater alignment of the Code with the current practice of the Panel, rather than introducing any new substantive requirements. The consultation closes on 12 June 2015.
Included with the PCP is a draft of a new practice statement concerning dividends. The statement is drafted on the basis that the Code is amended as proposed in the PCP. It is intended to set out in one place the Panel's practice in relation to the application of certain provisions of the Code to the payment of dividends. As such, the scope of the statement is not limited to the provisions discussed in the PCP, but also addresses, for example, the issue of offer-related arrangements as regards the payment of dividends.
Below, we outline the key proposals.
Reserving the right to reduce the offer price if a dividend is paid
Where a bidder makes a statement in connection with an offer it can, broadly, only set that statement aside where it includes an express reservation to do so. Additionally, where the statement relates to price, the bidder has to make to the offer on the same or better terms as those stated. However, where a target declares a dividend, a bidder may want to decrease its offer by the amount of the dividend in order to preserve value.
The Panel considers that the Code should, therefore, expressly permit a bidder to reduce its offer by the amount of all, or part, of a dividend which is subsequently paid by the target. If such a reservation is included in a possible offer announcement the bidder will be able to include the same reservation in any subsequent firm offer announcement or offer document.
Conversely, where a reservation relating to the payment of a dividend is not included in a possible offer announcement, the bidder will not, normally, be permitted to:
- reserve the right in any subsequent firm offer announcement or offer document to reduce the offer price, or
- reduce the offer price by the amount of all, or part, of a dividend which is subsequently paid by the target.
However, if a bidder announces an increased possible or firm offer, the proposed changes will allow it to introduce a reservation of the right to reduce the offer price by the amount of all, or part, of a dividend at that time (provided that the price will not be reduced below the value of the previous offer which was not subject to a reservation).
Conditions do not operate as reservations
By way of clarification, the draft Practice Statement states that, where a bidder includes a condition to its offer that the target company will not pay a dividend (but does not reserve the right to reduce the offer price), the Panel will not normally consider that the condition would, of itself, provide an adequate basis for reducing the offer consideration if a dividend is subsequently paid.
Prohibited offer related arrangements
The draft Practice Statement also clarifies that arrangements between the bidder and target relating to the payment of dividends, such as an undertaking not to pay dividends or not to pay dividends of more than a specified amount, constitute offer related arrangements of a type prohibited by the Code. Hence, if a bidder wishes to protect itself against value leakage caused by payment of a dividend, it should do so by reserving the right to reduce the offer consideration as described above.
The effect of a dividend where the offeror has made a “no increase statement”
Where a bidder states that it's offer is final or will not be increased (a no increase statement) the Code precludes the bidder from making an offer on better terms unless it expressly reserves the right to deviate from this in certain circumstances. However, if a dividend is declared by a target and shareholders are entitled to receive the dividend, this would effectively mean they are receiving more than the offer price. Therefore, it is currently the Panel's practice to require that the bidder reduces its consideration by an amount equal to the dividend so that the overall value receivable by target shareholders remains the same. It is, therefore, proposed that the Code be amended to reflect this practice. The rule will apply unless the no increase statement specifically reserves the right for target shareholders to receive the dividend in addition to the offer consideration.
The impact of dividends on a minimum offer price established by share purchases
Currently, a number of rules in the Code deal with the situation where target shareholders are allowed to receive dividends declared by target and the effect this has on establishing the highest price at which the bidder may acquire shares in the market without needing to revise its offer and/or establishing the level of a cash offer. These provisions differ slightly in their drafting and do not deal with situations where target shareholders are not entitled to receive a dividend in addition to the offer price. The PCP therefore proposes that the drafting of these provisions should be conformed and amplified so that that it addresses both situations, that is, where shareholders are allowed, and not allowed, to receive dividends. The proposed changes will mean that:
- where shareholders are entitled to receive a dividend:
- if the date on which the shares will cease to carry the right to that dividend has not yet passed (the "ex-dividend date"), the bidder may, in establishing the minimum level of the offer, deduct the amount of the dividend from the highest price paid by it for target shares,
- once an offer value has been announced, purchases by the bidder before the ex dividend date may be made at prices up to the aggregate of the offer value and the amount of the dividend without necessitating any revision of the offer, an
- purchases after the ex dividend date may only be made at prices up to the amount of the offer value without necessitating any revision of the offer, and
- when shareholders are not entitled to receive a dividend:
- the bidder may not, in establishing the minimum level of the offer, deduct the amount of the dividend from the highest price paid by it for target shares,
- once an offer value has been announced, purchases by the bidder before the ex dividend date may be made at prices up to the offer value without necessitating any revision of the offer, and
- purchases after the ex dividend date may only be made at prices up to the offer value less the amount of the dividend without necessitating any revision of the offer.
Where a dividend is declared but not paid
Where target shareholders are entitled to receive a dividend but the dividend is not ultimately paid there is a risk that target shareholders will not be treated equally. This is because the bidder will have been entitled to acquire shares at prices up to the aggregate of the offer value and the amount of the dividend (the cum dividend price). The daft Practice Statement, therefore, explains that, where the dividend is not ultimately paid, it is the Panel's practice to require the bidder to increase its offer to the cum dividend price to ensure that shareholders who accept the offer receive the same value for their shares as those shareholders had sold their shares to the bidder at the cum dividend price.
By better reflecting the Panel's actual practice in the Code
itself and overlaying this with the added guidance in the draft Practice Statement, the proposed changes should benefit not only bidders and targets but also target shareholders and other stakeholders.