From 20 May 2013, trustees of defined benefit pension schemes sponsored by a company that is the subject of a takeover bid will have to be given more information about the bidder’s plans for the scheme, and they will be entitled to publicise to the target’s shareholders their views on how the takeover will affect the scheme.
The new rights will apply on takeover bids that are governed by the UK Takeover Code. Broadly speaking, the Code applies to offers for public companies registered in the UK, the Channel Islands or the Isle of Man whose shares are traded on a regulated market in the UK (i.e. the Official List), AIM or on any stock exchange in the Channel Islands or the Isle of Man. The Code also applies to private companies whose shares were traded on a market during the previous ten years. The new rights will take effect from 20 May 2013, even if the offer has already been announced by that date, and will apply regardless of scheme size and where the scheme is based.
Under the new rules, when a bid is announced, the target company must provide a copy of the announcement to the trustees of its DB scheme(s) and, when the offer document is published, the bidder must send a copy to the trustees. Among other things, an offer document must include financial information about the bidder and details of how the offer is being financed. Under the new rules, the offer document will also have to include a statement by the bidder of its intentions with regard to employer contributions into the target’s scheme(s) (including with regard to current arrangements for the funding of any scheme deficit), the accrual of benefits for existing members, and the admission of new members. If the bidder makes any statement about a particular course of action it intends to take, it will be held to that statement for a period of 12 months (or any shorter period that it specifies), unless there is a material change of circumstances. In a hostile bid, where the target publishes a defence circular, the target must send a copy of the circular to the trustees.
Trustees will be entitled, but not obliged, to require the target to publicise to its shareholders the trustees’ written opinion on how the offer will affect their scheme. The Panel anticipates that trustees may wish to use this power to refer to wider matters, including the impact of the takeover on employer covenant strength. The target will have to pay for the costs of publication, but the trustees will need to bear the costs of verifying that all statements in the opinion are accurate.
The changes are intended to create a framework for debate as to the effects of an offer on the target company’s pension schemes and to allow the trustees of such schemes the chance to express their views. Any issues can then be taken into account by target shareholders. The new rules do not require the bidder to have reached agreement with the trustees of the target’s schemes on how the bidder will fund the schemes before the offer can become unconditional.
The changes bring the treatment of pension trustees under the Code more closely into line with that of the target’s employees. In many cases, this may reflect what has already been happening in practice. However, they underline a clear shift in the Panel’s thinking, to give trustees a formal role in the takeover process.
The Panel’s Response Statement, which sets out the amendments to the Code, can be found here.