On 1 June 2010, the Takeover Panel (the “Panel”) published a public consul-tation paper inviting comments on possible amendments to the Takeover Code (the “Code”), in particular the regulation of takeover bids. The Panel decided to consult, in part, as a result of the concern expressed in some quarters at Kraft Foods' takeover of Cadbury plc earlier this year. The consul-tation created a great deal of comment, concern and conjecture amongst market participants and other interested parties including academics, practi-tioners and trade unions and nearly 100 formal responses were submitted. The Panel has just published its response to the consultation.
The principal concerns expressed by certain commentators were that (i) it has become too easy for ‘hostile’ bidders (i.e., bidders whose offers are not from the outset recommended by the board of the target) to succeed; and (ii) the outcome of offers, particularly hostile offers, may be influenced unduly by the actions of ‘short-term’ investors (such as investors who acquire interests in target shares only after the possibility of an offer has been publicly announced).
The Panel has, in summary, concluded that “hostile offerors have, in recent times been able to obtain a tactical advantage over the offeree company to the detriment of the offeree company and its shareholders”. Consequently, the Panel intends to seek to reduce the tactical advantage held by hostile bidders and redress the balance in favour of the target.
The Panel has concluded that a number of additional changes should also be proposed to the Code to improve the offer process and to take more account of the position of persons who are affected by takeovers in addition to target shareholders.
As most commentators predicted, the Panel does not intend to incorporate some of its more controversial proposals such as raising the acceptance condition threshold above “50 per cent plus one”, disenfranchising shares during an offer period or extending the Code to apply to matters that are currently the responsi-bility of other regulatory bodies (for example providing protection to shareholders in bidder companies).
Proposed amendments to the Code
The Panel has concluded that amendments to the Code should be proposed with the objective of:
- increasing protection for targets against protracted ‘virtual bid’ periods;
- strengthening the position of the target;
- increasing transparency and improving the quality of disclosure; and
- providing greater recognition of the inter-ests of target employees.
The Panel proposes to achieve these objectives by amending the Code as follows.
Requiring potential bidders to clarify their position within a short period of time
Whilst the majority of respondents considered the Panel's existing ‘put up or shut up’ regime to work well, concern was expressed about the increased trend for ‘virtual bids’ whereby a potential bidder announces that it is considering making an offer without committing itself to do so.
The Panel is seeking to give targets more certainty over the length of offer periods and to avoid long periods in which the target is “effectively under siege from an unsolicited or unwelcome potential offer”. The Panel is also seeking to encourage bidders (i) to engage either in confidential discussions with the target board with the aim of an offer being a recommended offer; or (ii) to make a formal hostile offer. In addition, the Panel wishes to give a bidder a strong incentive to avoid its potential interest being leaked on the basis that as soon as a bidder’s identity is publicly announced it will have a fixed period to make a formal offer, announce it is not making an offer or seek an extension.
The Panel does not intend to extend the proposed amendments to the ‘put up or shut up’ regime and does not intend to proceed with its proposal to introduce a private ‘put up or shut up’ regime in respect of approaches from potential bidders before an offer period has commenced (in which case neither the approach nor the deadline would be publicly announced). However, the Panel stated that if a target were able to make a convincing case that it was subject to “an unacceptable level of siege in the circumstances of a particular case” it could exception-ally set a private deadline under General Principle 6 which protects a target against the conduct of its affairs being hindered for longer than is reasonable.
The Panel proposes to amend the Code as follows:
- to require that, following an approach, the potential bidder is named in the announce-ment which commences an offer period re-gardless of which party publishes the an-nouncement; and
- save with the consent of the Panel, to require any publicly named potential bidder within a fixed period of four weeks following the date on which the potential bidder is publicly named to (i) announce a firm intention to make an offer under Rule 2.5; (ii) announce it will not make an offer (whereupon it will be subject to the existing Rule 2.8 restrictions); or (iii) make a joint application with the target
to the Panel to extend the deadline and ex-plain the expected timetable to the an-nouncement of a firm offer under Rule 2.5 (following which an announcement would normally be required to update the market on the status of discussions and the revised timetable).
Except in certain limited cases, prohibiting deal protection measures and inducement fees
The majority of responses were in favour of interven-tion by the Panel in the area of deal protection measures and inducement fees, although the majority of responses also supported the Panel’s current approach of permitting inducement fees provided that, inter alia, they were de minimis (normally no more than 1 per cent of the value of the target).
However, notwithstanding the support for the Panel’s current approach, it is proposed by the Panel that deal protection measures and induce-ment fees should be prohibited (other than in certain limited cases).
The Panel is seeking to address the concern that, in the context of recommended offers, it has become standard practice for bidders to present a “standard package” of deal protection measures and an inducement fee at the maximum permissible level. It is felt that target boards are under considerable pressure to accept such requirements with little or no room for negotiation. The Panel is concerned that these bidder protections deter competing offers (thereby denying target shareholders the option of deciding on the merits of competing offers) and lead to competing offers on less favourable terms.
The Panel therefore proposes to introduce a general prohibition on inducement fee agreements and undertakings given to a bidder by the target board in respect of implementing an offer or refraining from taking actions which may facilitate a compet-ing offer.
The Panel recognises that a bidder could legiti-mately request specific undertakings from the target board in relation to confidentiality, non-solicitation of customers or employees and the provision of information to satisfy conditions to the offer or obtain regulatory approvals but the Panel is aware of the risk of incremental extension to the scope of undertakings and has indicated that it will not permit further undertakings beyond those specified above to be sought.
Clarifying that offeree boards are not limited in the factors that they may take into account in giving their opinion and recommendation in relation to an offer
The majority of respondents were not in favour of making the Code prescriptive in relation to the factors that the target board should take into account in considering whether to recommend an offer. However, the Panel notes the perception amongst certain market participants that the target board is bound by the Code to consider the offer price as the determining factor in giving its opinion and deciding whether to recommend an offer.
To address this concern it is proposed that the Code be amended to clarify that it does not limit the factors that the target board is able to take into account in giving its opinion on an offer and reaching a conclusion as to whether it should recommend an offer, and the target board is not bound to consider the offer price as the determining factor.
Requiring the disclosure of offer related fees
The Panel disclosed that the majority of respon-dents were in favour of greater disclosure being required in relation to the fees of the advisers to targets and bidders. The Panel had specifically sought feedback on whether success fees should be prohibited on the basis that they might (or might be seen to) compromise the objectivity of an adviser’s advice. A “substantial majority” of respondents considered that success fees should not be prohib-ited since they could serve to align the interests of clients and advisers and it was thought that reputa-tional concerns and disclosure would provide sufficient safeguards.
The Panel has concluded that incentive or success-based fees should not be prohibited (save to the extent already provided in the Code) but that the minimum and maximum amounts payable should be disclosed (in a manner that does not reveal commercially sensitive information regarding the offer).
The Panel further concluded that the Code should be amended to require that:
- the estimated aggregate fees should be set out by each party in the offer document or ini-tial target board circular;
- the estimated fees of the advisers to each party to an offer should be disclosed sepa-rately by category of adviser;
- fees relating to financing provided to a party should be disclosed separate from advisory fees; and
- material changes to disclosed estimated fees should be announced promptly.
Requiring the disclosure of the same financial information regarding a bidder and the financing of an offer regardless of the nature of the offer
Respondents to the consultation were evenly split as to whether further disclosure should be required of financial information in relation to a bidder and the financing of an offer. The Panel has historically taken the view that, during the course of an offer, information in relation to the financial condition of the bidder is generally only relevant in a securities exchange offer or where target shareholders could become minority shareholders in a company controlled by the bidder.
The Panel has, however, supported the view of some respondents that constituencies other than the target shareholders have an interest in information regarding the financial position of the bidder’s group. These include target directors (having regard to their obligations under the Code and the Compa-nies Act 2006), employees, customers, creditors and suppliers of both the bidder and target and shareholders in the bidder. A significant minority of respondents also supported the idea of requiring further disclosure to be provided by all bidders in relation to the financing of an offer, including the implications that the offer financing might have on the bidder, the target and their respective busi-nesses going forward.
The Panel noted that information (including web-sites) can now be incorporated by reference into documents required to be produced under the Code and that consequently bidders would be able to incorporate financial information into Code docu-ments, and make that information publicly available, quickly, easily and with little additional cost.
The Panel intends to propose amendments to the Code to:
- provide that detailed financial information on a bidder must be disclosed in all offers and not only in securities exchange offers;
- require, where the offer is material, the inclu-sion in offer documents of a pro forma bal-ance sheet of the combined group and details of the ratings attributed to the bidder by rat-ings agencies (and any changes that arise as a result of the offer);
- require the disclosure in greater detail than at present of the debt facilities or other instru-ments entered into by a bidder in order to finance the offer; and
- require all documents relating to the financing arrangements for the offer to be put on public display.
Improving the quality of disclosure by bidders and targets in relation to the bidder’s intentions regarding the target and its employees and improve the ability for employee representatives to make their views known
It is felt that whilst the current provisions of Rules 24.1 and 25.1 of the Code made adequate provision for disclosure, bidders and targets tended to disclose the minimum information required to comply with their obligations.
The Panel accepts that the ability of the target board and others to comply with their obligations depends on the accuracy and adequacy of the information published by the bidder. The Panel does not propose to make wholesale changes to the Code, however, amendments are proposed to require further disclosures to be made. The Panel has therefore concluded that bidders should continue to disclose details of any plans regarding the target’s employees, locations of businesses and fixed assets and proposes to add a new requirement for bidders to make negative statements if there are no such plans. In addition, the Panel proposes that, save with the consent of the Panel, statements in offer documents relating to such intentions (or the absence of such intentions) will be expected to hold true for a period of at least one year following the offer becoming or being declared wholly uncondi-tional (save where another period is stated).
Some respondents believed that better communica-tion between the target board and the target employees (and employee representatives) would enable employee representatives to be more effective in providing their opinions and would facilitate a wider understanding of the implications of the offer for target employees.
To address this concern the Panel proposes to amend the Code to:
- make it clear that the Code does not prevent the passing of information in confidence dur-ing the offer period to employee representa-tives acting in their capacity as such;
- require target boards to inform employee representatives at the earliest opportunity of their right under the Code to circulate an opinion on the effects of the offer on employment;
- make it clear that it is the target board’s responsibility to publish the employee representatives’ opinion at the target’s expense; and
- require the target to pay the costs incurred by the employee representatives in obtaining ad-vice to verify information in the employee rep-resentatives’ opinion.
Other proposed amendments to the Code which the Panel does not currently intend to implement
As noted above, the Panel does not intend to incorporate some of its more controversial propos-als, such as raising the acceptance condition threshold above “50 per cent plus one”, disenfran-chising shares during an offer period or extending the Code to apply to matters that are currently the responsibility of other regulatory bodies.
In addition, the Panel has decided not, for the time being, to pursue certain other proposals included in the consultation paper such as:
- reducing the disclosure threshold from 1 per cent to 0.5 per cent for Rule 8.3 purposes;
- reintroducing safeguards similar to the Rules Governing Substantial Acquisitions of Shares which were abolished in 2006;
- shortening the overall offer timetable;
- requiring separate advice to be made avail-able to target shareholders in addition to the independent advice provided to the target board under Rule 3;
- increasing transparency where the dealing, voting and acceptance decisions attached to a shareholding have been split between two or more persons; and
- disclosure of offer acceptance/scheme voting decisions.
In accordance with the Panel’s usual procedures, to the extent that the Panel has concluded that there is a case for proposing amendments to the Code, additional public consultation papers will, in due course, be published setting out the proposed amendments in full.
The Panel’s response to the consultation indicates its willingness to bring about a significant shift in the balance between bidder and target and also to level the playing field in takeovers. However, it remains to be seen whether (and how) some of the Panel’s more substantive proposals, such as the prohibition on inducement fees, will find their way into a revised Code and then into market practice.