Summary

From Monday 19 September 2011, companies that find themselves the subject of unwanted takeover speculation will have their hand strengthened by changes to the Takeover Code. The changes are the result of a wide-ranging review of the Code initiated after the takeover of Cadbury plc by Kraft Foods Inc in 2010. In order to stop target companies being put under siege for long periods, and particularly to prevent potential bidders putting a target into play, and hence under pressure, by announcing that they are considering making an offer, but without committing to doing so (a so-called “virtual bid”):

  • If on or after 19 September 2011 (the Implementation Date) a target company announces the existence of a possible offer or that it is seeking potential bidders, unless otherwise permitted by the Panel the announcement must identify every potential bidder with whom the target is then in talks, or from whom the target has received an approach which has not been unequivocally rejected. All such potential bidders must be named, irrespective of when they approached the target and whether or not any rumour and speculation about the target, or any untoward movement in the target’s share price, was caused by their actions. The announcement will put the target into an “offer period”.
  • When a potential bidder first makes a possible offer announcement, or a target first makes an announcement that identifies a potential bidder, that potential bidder will, within 28 days of the announcement being made, have to either make a firm offer announcement or announce that it does not intend to make an offer for the target (known as “put up or shut up” or “PUSU”) unless either:
    • the Panel agrees to extend the PUSU deadline. Only the target, and not the bidder, can request an extension; or
    • another potential bidder has already made a firm offer announcement, or subsequently makes a firm offer announcement before the deadline expires.
  • As a result of these changes, it is likely that:
    • Potential bidders may well delay approaching a target until they are fairly confident that they will be in a position to announce a firm offer if they decide to do so. This is likely to mean potential bidders doing more due diligence and strategic planning before an approach is made.
    • Private equity bidders may consider financing bids entirely through equity and then later syndicating the equity funding or refinancing it with debt. Private equity bidders will also usually be particularly keen to ensure that there is no announcement of their interest in the target or, if an announcement is made, that the target requests an extension to the PUSU deadline, because they may find it difficult to complete their due diligence within 28 days.
  • If on or after the Implementation Date a bidder announces a firm intention to make an offer that is to be implemented by means of a scheme of arrangement, the target will have to set out the expected timetable for the scheme in an announcement and in its circular to shareholders, and will have to implement the scheme in accordance with that timetable unless, among other things, the target board withdraws its recommendation of the scheme or decides to adjourn either a shareholder meeting that is required in connection with the scheme or the court hearing to sanction the scheme. To protect itself against the timetable being changed unilaterally by the target, a bidder will be permitted to include within the conditions to the scheme:
    • specified dates by which each shareholder meeting and the court sanction hearing must be held; and 
    • a long-stop date by which the scheme must become effective.

If a shareholder meeting or the court sanction hearing is not held within 21 days of the scheduled date for it specified in the scheme circular, or if the scheme does not become effective by the long-stop date, the bidder will normally be able to lapse its bid.

In addition, a bidder and any person acting in concert with it will be prohibited in most circumstances from entering into any “offer-related arrangement” with the target or any person acting in concert with it during the offer period or when an offer is reasonably in contemplation. “Offer-related arrangements” include break fees (inducement fees), exclusivity agreements, matching rights and other “deal protection” measures that are commonly sought by bidders. Offer-related arrangements that are entered into prior to the Implementation Date will be unaffected. The prohibition is likely to cause potential bidders to look for other ways to reduce the risk of bid failure. In some circumstances, this might mean bidders or their associates buying target shares in the market, or entering into a derivative contract referenced to target shares, particularly once an offer is likely to be made. Bidders may also pressurise their advisers to agree to more success-based fees.

If a bidder makes a statement in its offer document (or any document, announcement or information published in relation to its offer) relating to any particular course of action it intends to take, or not take, after the end of the offer period in relation to the target’s employees or any other matter then, unless there is a material change of circumstances, the bidder will be held to that statement for a period of 12 months from the date on which the offer period ends, or such other period of time as the bidder specified in the statement.

Other changes will require bidders to include more information in their offer document about how the offer is financed; the impact of the offer on the bidder’s earnings, assets and liabilities; and the fees payable to advisers in connection with the offer. Target employees will have more opportunity to make public their views on the offer and its impact on the target.

Identification of potential bidders and put up or shut up

While a bidder is considering making an offer for a target, there is nothing in the Code to prevent the bidder voluntarily making an announcement that, for example, it is interested in making an offer for the target, without committing to do so. In some circumstances, it may be tactically advantageous to make such an announcement: for example, to put the board of the target under pressure or to enable the bidder to approach more than six parties for the purpose of obtaining offer finance or commitments from target shareholders to accept an offer. 

In some circumstances, an announcement is required under Rule 2.2 of the Code. In particular, an announcement must be made if:

  • before an approach has been made by the bidder, the target is the subject of rumour and speculation or there is “untoward” movement in its share price and there are reasonable grounds to conclude that it is the actions of the bidder that are the cause;
  • following an approach by the bidder, the target is the subject of rumour and speculation, or there is an “untoward” movement in its share price; and
  • the bidder notifies the target board of a firm intention to make an offer (which is not, or has ceased to be, subject to any pre-condition).

An announcement under Rule 2.2 can simply say that the bidder and target are in talks or that the bidder is considering making an offer. Any such announcement that does not commit the bidder to making an offer, whether made voluntarily or to comply with Rule 2.2, is known as a “possible offer” announcement.

Currently, under Rule 2.4(b) of the Code at any time during an offer period following a possible offer announcement (provided that the bidder has been publicly named), and before the bidder has made a firm offer announcement, the target can ask the Panel to impose a time limit for the bidder to clarify its intentions with regard to the target. If a time limit for clarification is imposed by the Panel (normally between six and eight weeks, depending on the precise circumstances), the bidder must, before the expiry of the time limit, either make a firm offer announcement or announce that it does not intend to make an offer for the target (known as “put up or shut up”). If a bidder states publicly that it does not intend to make an offer for the target, it will normally be bound by the terms of that statement for a period of six months unless, during that time, there is a “material change in circumstances” or there occurs an event which the bidder expressly said would enable it to set aside its previous statement (e.g. if a competing bid is made for the target). But until the target asks the Panel to impose a put up or shut up deadline, and the Panel does so, the Code does not impose any deadline for the bidder to make a firm offer announcement or otherwise clarify its intentions.

Changes on 19 September 2011

When the board of the target first announces (i) the existence of a possible offer (either voluntarily or to comply with Rule 2.2) or (ii) that it is seeking potential bidders for the target, unless otherwise permitted by the Panel the announcement must identify every potential bidder with whom the target is then in talks, or from whom the target has received an approach which has not been unequivocally rejected. All such potential bidders must be named, irrespective of when they approached the target and whether or not any rumour and speculation about the target, or any untoward movement in the target’s share price, was caused by their actions. The announcement will put the target into an “offer period”.

When a potential bidder first makes a possible offer announcement, or the target first makes an announcement that identifies a potential bidder, that potential bidder will have to put up or shut up within 28 days of the announcement being made unless either:

  • the Panel agrees to extend the deadline. Only the target, and not the bidder, can request an extension; or
  • another potential bidder has already made a firm offer announcement, or subsequently makes a firm offer announcement before the deadline expires. Where the first bidder is proceeding by means of a contractual offer (rather than a scheme of arrangement), each potential bidder that has not made a firm offer announcement will have to clarify its intentions by a date specified by the Panel, which will normally be a date on or around 10 days before the final date on which the firm offer is capable of becoming unconditional as to acceptances (i.e. Day 50).

The Panel will normally give its decision on whether to extend a PUSU deadline shortly before the time when the deadline will expire. In determining whether to grant an extension, the Panel will take all relevant factors into account, including the status of negotiations between the target company and the potential bidder (including in relation to the offer price), and the anticipated timetable for their completion. But where an extension of a deadline is requested by the board of the target company, the Panel’s consent to such an extension will normally be granted. The 28-day deadline will therefore be of little relevance to a potential bidder that has the support of the target board, because the board will be able to seek an extension to the deadline.

Each potential bidder will be subject to its own deadline, set by reference to the date of the announcement in which it is first identified (not the date on which it first approached the target). A target can ask the Panel to extend the deadline for one bidder and not another. In practice, however, target boards will usually want to request deadline extensions that ensure there is a common deadline for all potential bidders.

Any announcement that first identifies a potential bidder, and which therefore gives rise to the setting of a 28-day deadline by which the potential bidder must clarify its position, will have to specify the date on which that deadline will expire. Details of all applicable deadlines, as specified in relevant announcements, will be set out in the Disclosure Table maintained on the Panel’s website.

The 28-day deadline will not apply to a potential bidder, or will cease to apply, where another bidder has previously announced, or subsequently announces, a firm intention to make an offer for the target company. The principal reason for this is that the purpose in introducing the 28-day deadline is to minimise the uncertainty caused by a “virtual bid” period and this concern will no longer apply if another bidder has announced a firm offer.

Any subsequent announcement by the target that refers to the existence of a new potential bidder must identify that potential bidder unless the announcement is made after another bidder has made a firm offer announcement.

If, before a bidder has made a firm offer announcement, the board of the target announces that it is seeking one or more potential bidders by means of a formal sale process, and a bidder agrees with the target to participate in that process, the Panel will not normally require that bidder to be publicly identified or to put up or shut up within 28 days.

Transitional arrangements

If an announcement is made by a target company on or after the Implementation Date:

  • which has the effect of commencing an offer period, such announcement will be required to identify any potential bidder with which the target company is in talks or from which an approach has been received (and not unequivocally rejected), except where a dispensation has been granted by the Panel;
  • which is subsequent to the commencement of the relevant offer period, and which refers to the existence of a new potential bidder, such announcement will have to identify that potential bidder, except where the announcement is made after a bidder has announced a firm intention to make an offer for the target company, or where a dispensation has been granted by the Panel.

Where a target company is already in an offer period on the Implementation Date, it will be required, by not later than 5.00 pm on the Implementation Date, to announce the identity of any potential bidder with which it is in talks, or from which it is in receipt of an approach, if, at the commencement of the offer period, it was in talks with, or had received an approach from, that bidder. In addition, the target company will be required to identify any potential bidder to whose existence it has referred in any announcement made since the offer period commenced and with which it remains in talks.

The requirement for the target company to identify any potential bidder will not apply where another bidder has announced a firm intention to make an offer for the target company before the Implementation Date.

Prohibition on break fees and other offer-related arrangements 

Background

In PCP 2010/2 the Panel noted that inducement fee arrangements and other deal protection measures, often set out in implementation agreements and other similar agreements, “have the effect, either individually or when viewed as a whole, of leaving little, if any, room for the board of a target company to facilitate or recommend a competing offer, thereby frustrating bids by potential competing bidders, contrary to the spirit of Rule 21 and General Principle 3.

Although in theory inducement fee arrangements and other deal protection measures are the subject of arm’s length negotiations between the board of the target company and a bidder, in practice the balance of negotiating power has shifted away from the boards of target companies in favour of bidders, to the extent that the board of a target company may consider itself unable to resist the package of “market standard” deal protection measures demanded by the bidder. As a result, it is argued, it has become increasingly difficult for competing bidders to emerge, or for the board of a target company to withdraw a recommendation to accept an offer, to the detriment of the interests of target company shareholders. The problem is most acute, it is argued, in relation to any provisions which seek to restrict or impede the ability of the board of a target company to withdraw or change its recommendation at any stage of the offer.”

Changes on 19 September 2011

From 19 September 2011, the bidder and any person acting in concert with it will be prohibited in most circumstances from entering into any “offer-related arrangement” with the target or any person acting in concert with it during the offer period or when an offer is reasonably in contemplation. But any offer-related arrangement entered into prior to the Implementation Date will not be subject to the prohibition.

An “offer-related arrangement” is defined broadly as “any agreement, arrangement or commitment in connection with an offer”. Unhelpfully, the new Rule does not specify the types of arrangements that are caught, but it seems clear from PCP 2010/2 and PCP 2011/1 that the following types of arrangements are prohibited:

  • break fee (inducement fee) arrangements, under which the target agrees to pay the bidder a specified sum if certain events occur that cause the offer to fail;
  • a non-solicitation undertaking that restricts the board of the target from soliciting competing offers (sometimes referred to as “no shop” provisions);
  • a notification undertaking that requires the board of the target to inform the bidder about any approach by a third party; •“matching rights” or “topping rights” that allow the bidder a limited period of time to match or improve upon a higher offer made by a competing bidder;
  • a “no information” undertaking that limits the information which the target board can pass to a competing bidder;
  • a commitment by the target not to identify the bidder in an announcement and/or to seek an extension to a put up or shut up deadline; and
  • an agreement entered into as part of the offer discussions for the target to sell certain assets to the bidder, to enter into a licence with the bidder, or for the bidder to provide financing to the target.

The following are not “offer-related arrangements”, and are therefore not prohibited:

  • undertakings from the target:
    • to keep confidential information that is provided to the target in connection with the offer;
    • not to solicit the bidder’s employees, suppliers or customers;
    • to provide information or assistance for the purpose of obtaining any official authorisation or regulatory clearance;
  • irrevocable undertakings and letters of intent from (i) target directors, in their capacity as shareholders in the target; or (ii) persons acting in concert with the target;
  • agreements that impose obligations only on the bidder or a person acting in concert with it – such as a “reverse break fee” or a standstill agreement – other than in the context of a reverse takeover; and
  • an agreement relating to any existing employee incentive arrangement of the target. For example, if the target’s remuneration committee has discretion over the number of target shares to be awarded, or amounts payable by way of bonus, the board of the target can agree with the bidder how such discretion will be exercised.

As an exception to the general prohibition on offer-related arrangements, where:

  • before a firm offer announcement has been made, the target board announces that it is seeking one or more potential bidders by means of a formal sale process, the Panel may allow the target to enter into an inducement fee arrangement with one bidder who participates in the sale process at the time of its firm offer announcement; or
  • a bidder has made a firm offer announcement and that offer is not being recommended by the target board, the Panel may allow the target to enter into an inducement fee arrangement with one or more competing bidders (white knights) at the time of their firm offer announcement,

provided that, in each case:

  • the aggregate value of the inducement fee or fees that may be payable by the target is de minimis (i.e. normally no more than 1% of the value of the target calculated by reference to the price of the (competing) offer at the time of the firm offer announcement); and
  • the inducement fee is payable only if an offer becomes or is declared wholly unconditional.

Schemes of arrangement

Where an offer is to be effected by means of a scheme of arrangement proposed by the target to its shareholders, under current Code Rules the bidder would typically require the target to enter into an agreement under which the target must implement the proposed scheme of arrangement in the manner and according to the timetable agreed with the bidder (an “implementation agreement”). However, from 19 September 2011, an implementation agreement will be an “offer-related arrangement” that will be prohibited if it is entered into on or after that date.

Instead, from that date the target will be required to set out the expected timetable for the scheme in an announcement and in its circular to shareholders (the scheme circular), and will be required by the Code to implement the scheme in accordance with that timetable unless, among other things, the target board withdraws its recommendation of the scheme or decides to adjourn either a shareholder meeting that is required in connection with the scheme or the court hearing to sanction the scheme. If such a meeting or hearing is adjourned, or the target board decides to propose such an adjournment, the target must make an announcement.

To protect itself against the timetable being changed unilaterally by the target, the bidder will be permitted to include within the conditions to the scheme (i) specified dates by which each shareholder meeting and the court sanction hearing must be held and (ii) a long-stop date by which the scheme must become effective. If a shareholder meeting or the court sanction hearing is not held within 21 days of the scheduled date for it specified in the scheme circular, or if the scheme does not become effective by the long-stop date, the bidder will normally be able to lapse its bid. The Panel has said that it expects parties to negotiate the specific dates, and whether such a condition should be included at all, in each case.

Where such a condition is included, and it is not capable of being satisfied on the date specified, the bidder must make an announcement stating whether it has invoked the condition, waived it or specified a new date for its satisfaction with the agreement of the target company.

The new rules will apply where, on or after the Implementation Date, a bidder announces a firm intention to make an offer that is to be implemented by means of a scheme of arrangement.

Information in the offer document and defence circular

Where an initial offer document is published before the Implementation Date, the offer document, the target board circular and any other documents published in relation to that offer must comply with the current provisions of the Code, even if, for example, the target board circular or any revised offer document is published after the Implementation Date.

Where the initial offer document is published on or after the Implementation Date, the offer document and any subsequent offer documentation will have to comply with the provisions of the revised Code described below.

Financial information relating to the bidder

At present, where the consideration offered is solely cash, and where the bidder is a company incorporated in the UK and its shares are admitted to the Official List or to trading on AIM, less detailed financial information on the bidder has to be included in the offer document than where the consideration offered includes securities. Where the bidder is not such a company, the offer document must include its financial results for the last three years, details of all known material changes in the bidder’s financial or trading position since the last published audited accounts (or a negative statement), and certain other information, “so far as is appropriate”, together with such further information as the Panel may require in the particular circumstances of the case.

In addition, where an offer comprising solely cash consideration is structured so that no person will remain or become a minority shareholder in the target company, the disclosures that would otherwise be required in relation to the financial situation of the bidder, and in relation to the financing of the offer, may be largely dispensed with.

However, offer documents will have to include financial information about the bidder, and how the offer is financed, even if the offer is solely in cash. Financial information on the bidder will be able to be incorporated by reference into the offer document. But a cash bidder will not be required to include details of all known material changes to its financial or trading position since the date of its last audited accounts, or a negative statement.

Because a bidder may be commercially disadvantaged if it is required to disclose the “headroom” that it may have secured in a financing agreement in order to be able to revise its offer, details of any headroom will not have to be disclosed in the offer document (or included in the copies of the documents that are put on display).

Similarly, because the structures by which equity is provided to private equity bidder vehicles may be commercially sensitive, details of such structures will not have 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.

Aggregate fees and expenses per category of adviser

Offer documents and target circulars will have to include:

  • An estimate of the aggregate fees and expenses expected to be incurred in relation to the offer.
  • A breakdown of the aggregate amount of fees by category of adviser.
  • In the case of a bidder, an estimate of the fees and expenses expected to be incurred in relation to the financing of the offer.

Summary of ratings and outlooks

An offer document will also have to contain details of the ratings and outlooks publicly accorded to the bidder and the target company by any rating agency prior to the commencement of the offer period, any changes made to those ratings or outlooks during the offer period and prior to the publication of the offer document, and a summary of the reasons given, if any, for any such changes.

Effect of an offer on target employees

Under current rules, the target’s employee representatives can require the target to circulate their opinion on the offer and its effect on target employees. But the opinion need not be circulated unless it is received “in good time” before publication of the target board circular. Where an offer is recommended, and the offer document and target circular are therefore combined, there is often little or no opportunity for target employees to submit an opinion before the offer document is published.

Under the new rules, a target will have to make available to its employees, or their representatives, any possible offer announcements, the firm offer announcement and the offer document. When doing so, the target must inform its employees, or their representatives, that they have a right to have an opinion on the effects of the offer on employment circulated to target shareholders (with any costs of verifying information in the opinion being borne by the target). If the opinion is received in time, it must be included in the offer document (where the offer is recommended) or the target’s defence circular (if the offer is not recommended). Otherwise, the target must publish the opinion on its website and announce that it has done so.

The new rules will apply with effect from the Implementation Date, even if the offer document to which the employee representatives’ opinion related is published before the Implementation Date.

Statements of intention

In its offer document, a bidder must state:

  • Its intentions regarding the future business of the target.
  • The long-term commercial justification for the offer.
  • Its intentions regarding any redeployment of the fixed assets of the target.
  • Its strategic plans for the target, and their likely repercussions on employment and the locations of the target’s places of business.
  • Its intentions with regard to the continued employment of the employees and management of the target and its subsidiaries, including any material change in their conditions of employment.

If a bidder has no intention of making any changes in relation to the third, fourth and fifth of these it must make a statement to that effect. The bidder must also state its intentions with regard to its own future business and cover the fourth and fifth of these with regard to its own employees to the extent that they are likely to be affected by the offer.

In practice, there may not be a great deal a bidder can say at the time when its offer document is published, and most bidders are rightly cautious about what they say if their intentions are not fully clear at the time the statement is made.

Under a new rule, if a bidder makes a statement in the offer document (or any document, announcement or information published in relation to an offer) relating to any particular course of action it intends to take, or not take, after the end of the offer period, whether relating to the target’s employees or otherwise, unless there is a material change of circumstances the Panel will regard it as committed to that course of action for a period of 12 months from the date on which the offer period ends, or such other period of time as the bidder specified in the statement.

Practical implications of the changes

The new rules requiring potential bidders to be publicly identified and to put up or shut up within 28 days, and to prohibit most break fees and other “offer-related arrangements”, represent a significant shift in the balance of power towards target companies. Possible implications of these changes include:

  • Potential bidders are likely to look for other ways to reduce the risk of bid failure. In some circumstances, this might mean bidders or their associates buying target shares in the market, or entering into a derivative contract referenced to target shares, particularly once an offer is likely to be made. Bidders may also pressurise their advisers to agree to more success-based fees.
  • Because of the risk of an announcement having to be made, and the 28-day PUSU timetable starting to run, some potential bidders will want to delay approaching a target until they are fairly confident that they will be in a position to announce a firm offer if they decide to do so. This is likely to mean doing more due diligence and strategic planning before an approach is made.
  • When an approach is made, target companies are likely to be pressurised by the bidder to disclose key non-public information as quickly as possible, so that if an announcement has to be made the bidder will at least have had as much time as possible to digest the information before it needs to put up or shut up.
  • Private equity bidders may consider financing bids entirely through equity and then later syndicating the equity funding or refinancing it with debt.
  • Private equity bidders will usually be particularly keen to ensure that there is no announcement of their interest in the target or, if an announcement is made, that the target requests an extension to the PUSU deadline, because they may find it difficult to complete their due diligence within 28 days. According to a survey carried out by the BVCA earlier this year, over 90% of respondents thought that it takes at least six weeks to organise a takeover of a public company, including setting up bank finance and doing due diligence.
  • Bidders are likely to work harder to get any debt financing for the bid agreed in principle before approaching the target.
  • Potential bidders that do not want to be publicly identified will need to take extra care to ensure that they are not responsible for details of their interest in the target being leaked.
  • Where a bidder’s approach is unwelcome, or the target board is concerned that a bidder is not serious, the target will be able to force the bidder to clarify its intentions within 28 days by making an announcement that it is in talks with that bidder.
  • Where a target company is in talks with more than one potential bidder, but no announcement has yet been made about the interest of any of them, in some circumstances there may be an incentive for one bidder to deliberately leak details of its own interest in the target in order to force the other bidders to clarify their intentions. This could make life difficult for the other bidders, particularly if they have only recently approached the target or will struggle to complete their due diligence or agree their bid financing within 28 days. 
  • Where a bidder has been publicly identified (whether willingly or not) and is serious about making an offer, but it is not ready to announce a firm offer by the PUSU deadline, in the days leading up to the deadline it is likely to pressurise the target board to request an extension from the Panel.
  • Bidders will need to consider carefully with their advisers when to make an approach, and both bidders and targets will need to consider with their advisers whether and when to make an announcement.
  • A bidder that is intending to use a scheme of arrangement is likely to want to include conditions in its offer that allow it to lapse the bid if key dates in the scheme timetable are not adhered to.

In addition:

  • More opinions of target employees are likely to be published.
  • There will be more disclosure of bid-related fees, and probably more media comment on how success and other fees payable to investment banks could affect their role in a bid.
  • Due to the insertion of new provisions in Rule 2 of the Code, an announcement of a firm intention to make an offer will now be a “Rule 2.7 announcement”, instead of a “Rule 2.5 announcement”.

Further information

For more information on the reasons behind the changes to the Code, and the Panel’s original proposals, see our LawNow article published on 25 October 2010 “Balance of power to be shifted towards takeover targets”.

The Panel’s Response Statement RS 2011/1, setting out the changes to the Code, can be found here.

The new version of the Code that will apply from 19 September 2011 can be found here.

Details of the transitional arrangements that apply when the changes come into force on 19 September 2011 can be found here.

The Disclosure Table showing which companies are in an offer period can be found on the Panel’s website here. The page also includes a link to sample formats of the new version of the Disclosure Table which will take effect from the “Final” version of the Disclosure Table to be issued by 5.30pm on 19 September 2011. The new version (v3) of the Disclosure Table will show details of the PUSU deadline for each potential bidder under the new rules.