Yesterday, the UK Takeover Panel issued Statement 2012/8 following its review of the changes to the Takeover Code introduced in September 20111. Those changes were introduced following the controversy relating to Kraft Foods Inc.’s bid for Cadbury plc2. At the time, the Panel indicated that given their significance, it would review their impact on market practice after a year or so.
The key points to note from the review are summarized below.
Protections against “virtual bids”
The new rules give target companies greater protection against protracted “virtual bid” periods (i.e., situations where a potential bidder announces that it is considering making an offer but does not commit to doing so). Specifically, subject to certain exceptions, they require target companies to identify all known potential bidders in any announcement which commences an offer period; and any potential bidder must "put up or shut up" by either making a firm offer or announcing that it does not intend to do so, within 28 days of that announcement, unless it, together with the target company, obtains the Panel's consent to an extension.
In the Statement, the Panel indicated that these changes appear to have worked well, and that in its view, there is no evidence of target companies having been put under siege for protracted periods. At the same time, and contrary to the prediction which was made by some at the time, the new rules do not appear to have deterred potential bidders. According to the Panel, the level of bid activity in the year ended 18 September 2012 (81 bids) was broadly consistent with that in the previous year (79 bids).
The new rules have clearly made the need for pre-announcement secrecy even more important, as any leak would lead to the imposition of a “put up or shut up” deadline and the possible withdrawal of the potential bidder. In the Statement, the Panel notes that over the last year, there has been a significant increase in the proportion of offer periods which commenced following the announcement of a firm offer (41 (2012) / 27 (2011)) and a significant reduction in the proportion of offer periods which commenced following an untoward share price movement or rumour and speculation with regard to a possible offer (24 (2012) / 46 (2011)). From this, the Panel infers (rightly, in our view) that the new rules have helped to reduce leaks in relation to takeover bids. This is obviously to be welcomed.
As regards the requirement for a potential bidder to “put up or shut up” within 28 days of its identification (unless the Panel extends the deadline), the Panel’s view is that this “has successfully provided the [target] company with the ability to control the duration of the period of uncertainty and disruption following the announcement of a possible offer.” Certainly, over the last year target companies have generally been willing to agree to extend the "put up or shut up" period (generally for 28 days), and in appropriate cases, to grant multiple extensions.
As regards the ability of target companies under the new rules to commence a formal auction process in order to avoid these requirements, the Panel noted that in the year ended 18 September 2012, 15 offer periods commenced with the announcement of such a process. The Panel’s view is that this mechanism has become a valuable option for target companies.
Prohibition of “offer-related arrangements”
One of the most significant changes made to the Code in 2011 was the introduction of the general prohibition on” offer-related arrangements”, such as break fees, exclusivity undertakings and implementation agreements. The Panel has taken a robust approach to this aspect of the new regime and has reviewed (among other things) cooperation agreements and directors’ irrevocable undertakings to ensure that they do not breach this prohibition. In the Panel’s view, some bidders have failed to comply with these rules by, for example, including:
- warranties by the target company, obligations on the target company to cooperate to implement the acquisition of the target company by the bidder or to produce offer documentation within a certain period, or restrictions on the target company’s ability to make announcements or to communicate with shareholders, in cooperation agreements; and
- restrictions on soliciting competing offers, commitments to recommend the bidder’s offer to shareholders, and undertakings to notify the bidder if the director becomes aware of a potential competing offer, in irrevocable undertakings by target company directors.
In this regard, the Panel’s comments reflect our experience to date. Some advisers and other market participants continue to “push the envelope” in relation to arrangements of this sort. In the Statement, the Panel indicated that it will take disciplinary action if it becomes aware of any further such breaches.
Disclosure of transaction fees
The new rules require parties to disclose details of the fees and expenses which are expected to be incurred in relation to the bid. Separate disclosure must be made of fees and expenses in relation to financial and corporate broking advice, legal advice, accounting advice, public relations advice, other professional services, other costs and expenses, and, in the case of a bidder, of its financing arrangements.
In the Panel’s view, these rules have not given rise to any major issues in practice.
Disclosure of financing arrangements
The new rules require bidders to disclose additional information about the financing of its bid, including the amount of each facility, the repayment terms, interest rates, any security provided, and details of the key covenants. In addition, documents relating to the financing of the bid are now required to be put on display once a firm intention to make the offer is announced, without redaction.
Again, in the Panel’s view, these changes have not posed significant difficulties in practice. The main challenge has been with “market flex” provisions. A market flex provision enables an arranger to change the pricing of a loan if changes in the market mean the arranger needs to adjust the price in order to be able to syndicate the loan. The Panel has recognised that in some cases, disclosure of such provisions could have the effect of increasing a bidder’s financing costs, because potential syndicatees might be able to negotiate their participation in the syndicate on more favorable terms if they know the maximum extent to which the lead arrangers have the ability to “flex” the relevant terms. In light of this, the Panel has granted several dispensations to allow such provisions to be disclosed at the time of the offer document, rather than at the time of the announcement of a firm intention to make a bid. In such cases, if the debt is syndicated by that time, the terms upon which the debt is being provided must be described in the offer document, and the final form of the financing documents must be published on a website, but the Panel will not require the market flex arrangements (which will no longer be relevant at that stage) to be described or published. However, if the debt is not syndicated by that time, the market flex arrangements will have to be described in the offer document, and the full terms then published on a website. This represents a pragmatic approach to a difficult issue.
Disclosure by bidders of their intentions in relation to the target company and its employees
Essentially, the new rules require bidders to disclose their intentions regarding the target company and its employees, and provide that if a party to a bid makes a statement relating to any particular course of action it intends to take, or not take, after the end of the offer period, then it will be regarded as being 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 is specified in the statement, unless there has been a material change of circumstances.
The Panel is clearly disappointed by the progress which has been made in this regard. It notes that, contrary to its stated desire for such disclosures to be as detailed as is possible on the basis of the information that is known to the bidder at the time, some bidders have continued to make general, non-specific disclosures. In the Statement, it warns that if a bidder makes a general statement and then subsequently takes action, such as making a significant number of employees redundant, to which it had ot referred in the offer document, it would wish to investigate whether, at the time that the offer document was published, the offeror had in fact formulated an intention to take that action. If it had done so, this would be regarded as a serious breach of the Code.
It will be interesting to see if the Panel will at some stage bring disciplinary proceedings against a bidder for failure to observe these rules, and if so, what the outcome will be.
Role of employee representatives
Finally, the new rules introduced changes intended to improve communication between the board of directors of the target company and its employee representatives and employees, and to enable the latter to be more effective in providing their opinion on the effects of the bid on the employees.
In the Panel’s view, the new rules appear to have had their intended effect, and do not appear to have caused major difficulties or to have imposed a disproportionate burden on target companies.
So where does that leave us?
While the review will not, in the short term, result in any specific proposals to make further amendments to the Code, the Statement suggests that the Panel may, at some stage, bring forward proposals in relation to:
- the formal “auction” sale process regime (as to which, see above), including the circumstances in which a formal sale process may be initiated by a target company; and
- the scope of the general prohibition on “offer-related arrangements,” and, specifically, the arrangements which are not currently subject to the prohibition.
More significantly, the Statement also suggests, in fairly blunt terms, that the Panel will, in appropriate circumstances, bring disciplinary proceedings where parties enter into arrangements which breach the general prohibition on “offer-related arrangements” (including arrangements of the sort referred to above) or breach the rules requiring proper disclosure of their intentions in relation to the target company’s employees. Parties to bids and their advisers should heed this warning.