After publishing its October 2010 response statement to the consultation on proposed changes to the Takeover Code (see “The Takeover Panel – Proposed Changes to the Takeover Code”, DechertOnPoint (October 2010), available at http://www.dechert.com/library/C&S-SA-10-10-The_Takeover_Panel.pdf), the Takeover Panel has now published its formal consultation paper setting out the detailed Code amendments it has proposed to introduce (see http://www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/2011-8.pdf). The consultation period runs until 27 May 2011. Overall, there has been little movement in the fundamental principles set out in the Panel’s October response statement, despite vocal lobbying from the private equity world and elsewhere.

The key areas of change are set out below.

Increasing the Protection for Target Companies Against Protracted “Virtual Bid” Periods  

The Panel is seeking to protect target companies against protracted “virtual bid” periods (i.e. where a potential bidder announces that it is considering making an offer but without committing itself to doing so). This protection is proposed to be given by amending the Code to require that:  

  • following an approach to the target board, the potential bidder is named in the announcement which starts the offer period regardless of which party publishes the announcement; and  
  • any publicly named potential bidder must, within a fixed period of 28 days following the date on which it is publicly named:  
    • announce a firm intention to make an offer under Rule 2.5;  
    • announce that it will not make an offer, at which stage it will then be subject to the Rule 2.8 restrictions; or  
    • make a joint application with the target for an extension to the deadline and provide the expected timetable to the announcement of a firm intention to make an offer under Rule 2.5. An announcement of such an application would then normally be required to be made to update the market on the status of discussions and the revised deadline. The Panel will take “all relevant factors” into account in determining whether to grant an extension, but the Panel believes that where an extension is requested by the target it will normally be granted. However, the Panel proposes that it will only give its decision shortly before the deadline, so it will not be possible for the parties to an offer to pre-agree a longer negotiation period at the outset of the 28 day period.  

The Panel believes that the amendments will shift the balance in favour of targets and reduce the perceived advantage hostile bidders have over the target and its shareholders in that:  

  • the Panel feels that the identity of a potential bidder may be an important factor for target company shareholders and other market participants and would assist them in forming a view as to the likelihood of the bidder proceeding to make a firm offer;
  • target companies would have more control of the timing of the process and will be subject to a shorter period of uncertainty and disruption prior to a formal offer being announced;  
  • target boards will no longer have to make the potentially difficult and contentious decision as to whether to identify a potential bidder and/or request the Panel to impose a “put up or shut up” deadline; and  
  • an early leak of a possible offer can have a materially detrimental and disruptive effect on the target company but very little effect on a potential bidder whose identity remains secret. The risk of leaks will be reduced on the basis that, as soon as a potential bidder’s identity is publicly known and an offer period commences, the potential bidder has four weeks to announce a firm offer under Rule 2.5. The Panel hopes that this will lead to offers being conducted by confidential discussions with the target board leading either to a recommended offer or a formal hostile offer conducted in accordance with the established Code timetable.  

Multiple Bidders

Where a target has received approaches from, or is in talks with, more than one potential bidder the Panel believes that each such potential bidder should be identified where the offer period is commenced by a target company announcement regardless (perhaps unfairly) of whether rumour and speculation concerning a particular potential bidder gave rise to the requirement for an announcement.

The Panel feels that whilst this may force a potential bidder’s hand at an early stage in its consideration of an offer, that potential bidder should not be unduly prejudiced on the basis that it still has four weeks to announce a firm intention to make an offer or to make sufficient progress in its negotiations with the target board to enable a joint application for an extension to be made.

Once an offer period has started, however, the Panel does not intend to require target companies to announce the existence of new potential bidders: (i) unless such new potential bidder is subsequently identified (accurately and specifically) in rumour and speculation; or (ii) where the target itself wishes to refer to the existence of a new potential bidder (prior to the announcement by any other bidder of a firm intention to make an offer). In both of these cases the Panel will require the new potential bidder to be identified. If all identified potential bidders were to announce that they had no intention to make an offer, an offer period would therefore end notwithstanding that the target board might remain in discussions with a potential bidder whose existence had not been referred to previously.

The Panel considered whether, where there were multiple bidders, the deadline for announcing a firm offer applicable to the latest potential bidder to be identified should apply in respect of all potential bidders. The Panel was mindful that if a bidder was always subject to the latest deadline to any other potential bidder this would result in an automatic extension to the “virtual bid” period. The Panel has therefore concluded that each potential bidder should be subject to its own four week deadline set by reference to the announcement in which it was first identified. That said, the Panel has recognised that target boards may wish to request deadline extensions to bring all potential bidders into line. A potential bidder whose deadline is not extended and who announces that it does not intend to make an offer would nonetheless be at liberty to make an offer in the event a third party announces a firm intention to make an offer.

Alternative to Public Identification of Potential Bidders

Following publication of the Panel’s response statement in October 2010, concerns were expressed that a requirement to identify publicly potential bidders may deter potential bidders from approaching targets or lead to them withdrawing from negotiations at an early stage to avoid being identified publicly; and where there are multiple potential bidders, result in public identification of one or more potential bidders who were in no way responsible for the events which triggered an announcement.

For the various reasons outlined above the Panel felt, on balance, that the benefits of identifying potential bidders in all cases outweigh the risk that bidders may be deterred from making an offer and has therefore decided not to pursue an alternative approach.

Strengthening the Position of the Target Company

Break Fees and Similar

The Panel has not changed its proposal to impose a general prohibition against “offer-related arrangements”. “Offer-related arrangements” is a broadly defined concept; designed to catch, amongst other things, any deal protection measures such as notification undertakings, target board undertakings in relation to their recommendation of a bid, exclusivity/no-shop agreements, implementation agreements (used in schemes of arrangement), matching/topping rights, no information undertakings, “force the vote” provisions, shareholder direction resolutions and “no piggy-backing” undertakings, together with any inducement fee arrangement, including any arrangement which has a similar financial or economic effect to an inducement fee, even if any such arrangement does not actually involve any cash payment and no matter how it is structured.

A bidder will still be able to seek certain limited undertakings (unchanged from the position outlined in October), namely: (a) confidentiality; (b) non-solicitation of a bidder’s employees, customers or suppliers; (c) the provision of information or assistance for the purposes of satisfying bid conditions or obtaining regulatory approvals; and (d) limited irrevocable undertakings from members of the target board.

It is proposed that in certain other limited circumstances, “offer-related arrangements” may be permitted: (a) following the announcement of a hostile bid, the target may agree to give a single 1% break fee to a “white knight” that subsequently announces a bid, payable only if an offer made by a party other than the “white knight” becomes wholly unconditional; (b) if the company has put itself up for sale through a formal sale process, the target will be able to apply to the Panel to permit giving a 1% break fee to a bidder where that bidder announces a firm intention to bid; and (c) where a company is in such serious financial distress that its board is actively seeking a bid for it, the Panel may be approached for a dispensation from the general prohibition (although no specific Code amendments will be proposed in respect of this third exception).

As mentioned above, implementation agreements and “force the vote” requirements will no longer be permitted where a takeover offer is to be effected by means of a scheme of arrangement. The parties will, however, be required to agree a timetable pre-announcement and the target will then be required to carry out the various necessary scheme of arrangements steps in accordance with that agreed timetable. However, it should be noted that this requirement will fall away if: (a) the target board withdraws its recommendation; (b) the target proposes an adjournment of a shareholder meeting or court sanction hearing; (c) a shareholder meeting or court sanction hearing is otherwise adjourned. In these circumstances, the Panel will normally consent to a bidder’s request to “switch” to a contractual offer with an acceptance condition set at up to 90%.

Target Board’s Factors

The Panel does not intend to prescribe the factors that the target board must consider in coming to its view on the merits of an offer. However, it intends to include a new note to Rule 25.2 to clarify that the Code does not limit the factors which the board can take into account in reaching its conclusion on whether to recommend a bid or not, and in particular is not required to consider the offer price as the determining factor.  

Increasing Transparency and Improving the Quality of Disclosure

Advisers’ and Financing Fees

In an attempt to improve transparency, it is proposed that the Code will require the disclosure of:  

  • the estimated aggregate fees payable by each party to the bid;  
  • estimated fees by category of adviser (financial advisers, lawyers, accountants, PR advisers, management consultants, actuaries and other specialist advisers); and  
  • in the case of the bidder, an estimate of financing fees expected to be incurred (including details of up-front fees, draw-down fees and commitment fees).  

If arrangements with an adviser provide for a variable fee within defined limits, a range of the maximum and minimum amounts expected to be incurred must be disclosed. If the arrangement provides for an uncapped fee, disclosure of a reasonable estimate must be made, together with an indication of the nature of the arrangement.  

If, during the course of the offer, the estimated aggregate fees or a particular category of fees increase beyond the level disclosed (or if, by the end of the offer, the final fees are greater than the amount disclosed), a private disclosure is required to be made to the Panel. If the Panel thinks it appropriate, it may require public disclosure of the revised amount.

Financial Information on Bidder and Target Companies

The Panel has not shifted from its view that various stakeholders have an interest in the financial position of the bidder, even where its offer is solely cash. It has therefore decided that all bidders, regardless of the type of consideration offered, must provide the same level of financial information. Note however that the current requirement to disclose material changes in a bidder’s financial or trading position since its last published annual accounts remains limited to securities exchange bids (on the basis that the Panel believes that the considerable cost involved in assessing whether there have been any material changes is not justified by the marginal benefit this information would give in the context of a cash bid).

The Panel maintains its view that ratings and “outlooks” provided by ratings agencies can provide valuable information as to how the financial strength and creditworthiness of the bidder may be affected by the bid. As a result, it is proposed that the Code be amended to require details of the ratings and outlooks publicly attributed to the bidder and the target by ratings agencies (and any changes that arise during the offer period) to be disclosed in the offer documents.

Thankfully, in light of comments received since the October response statement, the Panel has dropped its original proposal to require bidders to provide a pro forma balance sheet for the combined group in the offer document.

The Panel has also accepted that, given the widespread use of websites for the dissemination of financial information and the ability to incorporate most of the required financial information by reference, the Code should be amended: (a) to delete references to individual items of financial information that are required to be included in offer documents; and (b) to require bidders to provide a web address where the audited accounts and interim statements and/or preliminary announcements of the parties to the offer for the last two financial years (a reduction from the current three year requirement) have been published.

Offer Financing

The proposed changes to the Code follow the view the Panel took in the October response statement, namely to introduce amendments so as to require the debt facilities or other instruments entered into by a bidder in order to finance a bid to be disclosed irrespective of whether the payment of interest on, repayment of, or security for, the liability is dependent to any significant extent on the business of the target. Furthermore, all such financing documents must be displayed, without redaction, from the time of the announcement (rather than the time of posting as is currently the case). However, there is, for obvious reasons, no requirement to disclose in the offer document (or put on display) details of any headroom that exists in its financing agreements in order to be able to revise its offer.

The Panel acknowledges that the structures by which equity is provided to private equity bid vehicles may be commercially sensitive and accepts that such equity structures need not be required to be disclosed in detail. For example, the Panel considers that a statement that the bidder vehicle’s equity was to be provided as to £A million from the private equity house’s European Fund I and £B million from its European Fund II would suffice. It would not, for example, be necessary to disclose the leverage within such funds or the split, categorisation or identity of the limited partners, general partners or other underlying participants in the equity financing.

Providing Greater Recognition of the Interests of the Target’s Employees

The proposals in this area clearly stem from what happened following Kraft’s bid for Cadbury. In October’s response statement, the Panel made clear that the Code should be amended so as to improve the quality of disclosure by bidders and target companies in relation to the bidder’s intentions regarding the target and its employees. In fact, the proposals in some areas now go further than the October suggestions.

Being Held to Statements of Intent

Where a bidder or target board makes a statement during the course of an offer period, whether in a document, an announcement or otherwise, relating to any course of action it intends to take or not to take after the end of the offer period or relating to its strategic plans or intentions regarding employees of either party, it will be held to such statements for at least 12 months (or such other period as may be set out in the statement). If it subsequently acts contrary to its stated intentions and cannot demonstrate to the Panel that the statement was reasonable at the time it was made, the Panel may take disciplinary action against that party (for example, public censure, a fine or, in extreme cases, a “cold shouldering” order).

Information Flow to Employee Representatives or Employees

In a further attempt to improve the quality of disclosure and transparency in this area, it is proposed that the Code be amended to make clear that there is nothing to prevent information from being passed in confidence by a bidder or a target to their respective employee representatives or employees, or by a bidder to the target company’s employee representatives or employees, provided that the overarching Code requirement for secrecy is respected. In addition, employees must in future be notified that an offer is being made at the start of the offer period, rather than having to wait until the bidder announces its firm intention to make an offer.

The Employee Representative’s Opinion

In addition, it is proposed that, whenever employee representatives or employees are so informed of the start of an offer period, or of the announcement of a firm intention to make an offer, they should also be informed of the right for employee representatives to have a separate opinion on the offer, once it is made, appended to the target board circular at the company’s expense, provided that such opinion is received in “good time” (being, in the Panel’s view “in sufficient time to publish [the employee representatives’ opinion] with the target board’s opinion”).

The Panel acknowledged that the Code contains no provision for the situation when the employee representatives do not meet this deadline, such that, if their opinion was not received “in good time”, it would not be required to be appended to the circular. The Panel made clear that, since the time between publication of the offer document and publication of the target board circular is normally a maximum of 14 days, it would be reasonable to provide for some means of publication of an employee representatives’ opinion which fails to meet that deadline, especially since, on a recommended offer, the offer document and the target board circular will normally be combined. However, the Panel acknowledged that it would be unreasonable to require the target company to pay for the publication and circulation of the employee representatives’ opinion in hard copy form in those circumstances since an additional mailing to all shareholders and persons with information rights could involve the target company incurring considerable extra expense in doing so. The Panel proposes that the target company should be obliged, in those circumstances, to publish the employee representatives’ opinion on a website and to announce via an RIS that it has done so.

In a further attempt to facilitate employee representative involvement, it also proposed that the target must pay for the costs reasonably incurred by the employee representative in obtaining any advice required for the verification of the information contained in the employee representative’s opinion.  

Next Steps

The Panel has asked for comments on its proposals by 27 May 2011. Once the Panel has considered responses to the consultation it will publish a response statement setting out the final text of the amendments to the Code. The Panel proposes that there will then be a short period of not less than one month before the amendments to the Code are implemented. As the proposed amendments, whilst being relatively extensive, are not anticipated to require the introduction of major systems changes there is unlikely to be any lengthy transitional or implementation period.

Comment

Despite some vocal lobbying (not least from the private equity community), the Panel has broadly stuck to the key principles put forward in October.

Bidders

There is little doubt that the accelerated “put up or shut up” timetable and the increased scope for being named by the target will have an effect on the way potential bidders commence their bid preparations (especially private equity/financial bidders and consortia). Even greater attention will need to paid to maintaining secrecy. Preparations will need to be (even) further advanced before making an initial approach to a target.

Will the general prohibition on deal protection measures damage deal activity? Private equity commentators certainly think so; claiming that deals will not get done without the safety net of the break fee and other protective measures. Perhaps the market will see an increase in strategic stake-building as a means of protecting bidders? Perhaps there will be greater focus on when (and from whom) irrevocable undertakings are sought?

Targets

The target board may well now have greater tactical power to influence the initial stages of the bid process. This increased leverage may mean, however, that target boards and their decision making comes under even closer scrutiny from shareholders and others.

Will the proposals discussed above address the concern initially raised by the Panel that hostile bidders have, in recent times, been able to obtain a tactical advantage over target companies to the detriment of the target and its shareholders? Will they reduce this tactical advantage and redress the balance in favour of the target? Whilst the measures proposed may well influence the “first steps of the dance”, influencing tactics in the initial stages of the bid process, and possibly deterring some from proceeding; but are they likely to affect the outcome of a bid once its launched? It remains to be seen.