In our Client Alert in March and our April edition of the European Regulator we outlined proposed (and quite radical) amendments to the UK Takeover Code (Code). The final form of these amendments came into effect on 19 September 2011.
Background and rationale for the reforms
The changes to the Code have come about following concerns about a target company’s ability to protect itself against a hostile takeover bid as well as the influence of short term investors on the outcome of a bid. Notably, the changes have been driven by the negative public and political reaction surrounding the hostile takeover bid by US Kraft Foods for UK listed Cadbury plc early last year which resulted in the UK Takeover Panel (Panel) initiating a public consultation on reforms to the Code.
The changes to the Code significantly alter the UK takeover regime and it is not yet clear what impact the reforms will have on the level of public M & A activity in the UK. What is clear is that the changes mean a further divergence of the Australian and UK takeover regimes.
Key objectives of the reforms
Among other things, the amendments to the Code seek to strengthen a target company’s position by:
- increasing its protection against protracted “virtual bids” by requiring bidders to confirm their position within a shorter time frame;
- prohibiting deal protection mechanisms such as exclusivity arrangements, implementation agreements and break fees; and
- improving and increasing the level and quality of disclosure - including details about advisers’ fees and financing and security arrangements.
The Code requires announcements to be made in certain situations, including where there has been a leak to the market about an approach to the target or movement in the target’s share price. In such cases it has been usual for a target to issue a holding announcement that it is a potential takeover target without disclosing the bidder’s identity. A potential bidder may also make a holding announcement in which it states it is considering making an offer for the target. The target may face market volatility and business disruption during this virtual bid period.
Following a holding announcement, the target may request the Panel to issue a notice requiring the bidder to either withdraw or make a formal offer within six weeks (an alien concept in Australia but commonly referred to in the UK as a “put up or shut up” declaration). The Panel cannot intervene of its own accord.
If a holding announcement is made then (unless the target has put itself up for auction) under the new rules:
- all potential bidders who have approached the target at the time of the announcement must be named; and
- any bidder so named must within 28 days of the announcement either withdraw or announce a formal offer. Any bidder withdrawing cannot make another offer for that target within 6 months.
Under these new rules, some of the target’s flexibility to make a holding announcement will be removed and the bidder will face a much reduced time period within which it must either announce a firm offer or withdraw. A bidder may find itself being identified through no fault of its own if the leak originates from the target, a competing bidder or any of their advisers.
Only the target may make an application to the Panel to extend the 28 day deadline. Therefore, the bidder will need the target to be onside if an extension is required by the bidder.
No doubt the changes will encourage bidders to avoid leaks about approaches to potential targets and will remove the sometimes difficult decision of whether to seek a ‘put up or shut up’ deadline.
No deal protection mechanisms
Certain deal protection mechanisms including break fees, implementation agreements, rights to match or top competing bids and exclusivity arrangements were used frequently in bids in the UK (as remains the case in many countries).
Following the amendments to the Code, however, offer-related arrangements (i.e., deal protection mechanisms) entered into either before or after the offer between the bidder and the target (and any persons acting in concert with it) are prohibited, unless:
- the Panel’s consent is obtained; or
- the target is the subject of an auction; or
- the target is in financial distress; or
- the bidder is a white knight in a hostile bid situation - in these circumstances the Panel may consent to an inducement fee arrangement between the target and one white knight competing bidder provided the fee is capped at 1% of the value of the target).
Offer-related agreements do not include:
- confidentiality arrangements (provided they do not contain any provisions prohibited under the Code);
- non-solicitation agreements (in relation to employees, customers and suppliers);
- commitments to assist (in relation to obtaining regulatory clearances); or
- deal protection mechanisms entered into with shareholders of the target, such as irrevocable commitments and letters of intent.
As a result of the prohibition on deal protection mechanisms, bidders will need to plan effectively at the pre-bid stage to avoid wasted costs: bidders will not be able to recoup any costs from a target in the nature of break fees.
More detailed and additional disclosure
Under the revised Code bidders will need to make additional disclosures, including greater financial information on its offer and details about its intentions for the target’s business and employees.
Disclosures on fees and expenses
Bidders and targets will be obliged to disclose:
- an estimate of the aggregate fees and expenses related to the offer, including financing fees and advisers fees (e.g., brokers, accountants and legal advisers, financial advisers, PR and specialist advisers); and
- a breakdown of the aggregate amount of fees by category of adviser.
Bidders will also be required to provide an estimate of the fees in relation to financing the offer, including up-front and commitment fees.
Financing the offer
In all offers (not just scrip offers) detailed disclosures relating to debt facilities and refinancing instruments will need to be made in the offer document, including information about amounts borrowed, repayment terms, interest rates, lender identity, security and key covenants. Where there are private equity parties involved, details of which fund will be financing the offer will need to be disclosed.
All financing documents will need to be published on a website throughout the offer period.
Intentions for the target, its business and employees
Bidders will be required to state their intentions (based on the information known to them at the time) in relation to the future business of the target and the continued employment of the target’s employees. The statement could take the form of a negative statement if the bidder has no intentions to make changes to the target, its business or employees. These statements will be binding for at least 12 months following an offer being declared unconditional except where there has been a material change of circumstances.
The mandatory 28 day ‘put up or shut up’ may result in a greater number of offers being withdrawn and shorter due diligence time frames for bidders.
Financing arrangements will need to be in place earlier on in any proposed transaction and, where the 28 day ‘put up or shut up’ has been triggered, bidders should be mindful that if the 28 day period is not sufficient they will need the target to apply to the Panel for an extension.
Bidders will no longer have the comfort of relying on break fees to cover the costs of making an offer and will be required to provide enhanced disclosure relating to the offer.
The UK Panel will review the impact of the changes to the Code within 12 months of 19 September 2011. It remains to be seen what effects the amendments to the Code have on the takeover landscape in the UK. One thing that can be said, however, is that on 19 September 2011 the UK takeover regime diverged significantly from the Australian takeover regime.