On 21 March 2011, the UK Panel on Takeovers and Mergers (the Panel) published a consultation paper (PCP 2011/1) setting out detailed, and potentially far reaching, changes to the City Code on Takeovers and Mergers (the Code). If implemented, they would materially change the way in which takeover bids are conducted in the UK, and would alter the balance of tactical advantage between target companies and potential bidders.
Essentially, the proposals would:
- provide additional protection for target companies against protracted “virtual bids” (i.e., where a potential bidder announces that it is considering making a bid, but does not commit itself to do so) by requiring potential bidders to be identified at the start of the offer period, and for such bidders to clarify their position within a short period of time;
- strengthen the position of target companies by prohibiting break fees and other deal protection measures;
- require greater disclosure in relation to how the bid is to be financed, and of bid-related fees and expenses;and
- introduce specific changes to ensure that the interests of the target company's employees, in relation to the bid, are adequately recognised.
Following the public controversy relating to Kraft Foods Inc.’s bid for Cadbury plc, in February 2010 the Panel announced that it intended to launch a public consultation on proposed changes to the Code. This consultation was launched in June 2010 (PCP 2010/2). In October 2010 the Panel issued a response statement in which it stated that it intended to amend the Code to implement several of the changes which had been proposed in that consultation paper (Statement 2010/22).
The latest consultation paper sets out the detailed rule changes which are proposed to be made and invites comments. The consultation period will end on 27 May 2011, but it is widely expected that the changes to the Code which are contemplated in the consultation paper will be implemented in the second half of 2011 without significant amendment.
Protections for companies in relation to “virtual bids”
Currently, statements by a potential bidder that it may make a bid do not require it to do so1. In recent times, some potential bidders have made such statements in order to put pressure on the target board to open its books or to gauge likely market reaction. Also, while the Panel will normally require an announcement to be made of a possible bid approach (by the potential bidder if no approach to the target has been made, and by the target company if it has been) where there is rumour or speculation or a material movement in the target company’s share price, there is currently no general obligation on a target company to identify the potential bidder when the announcement is made.
The proposals would require that in future:
- target companies identify any potential bidder with whom the target is in talks or from whom it has received an approach (unless that approach has been unequivocally rejected); and
- potential bidders which have been publicly named, within four weeks of the relevant announcement, either (i) announce a formal offer; (ii) announce that they do not intend to do so (in which case, as at present, they will not be permitted to do so for six months); or (iii) to make a joint application with the target company to the Panel to extend the deadline.
It is proposed that the Panel would be able to grant a dispensation from these requirements where a potential bidder is participating in a formal auction process which has been commenced by the target company.
While it is clearly undesirable for target companies to be subject to protracted “siege” as a result of a virtual bid, the proposals may encourage target companies to announce the identity of potential bidders in order to make them subject to the four week “put up or shut up” requirement. This may, in turn, deter potential bidders from approaching target companies. It is also doubtful whether the four week period is sufficient to allow potential bidders to carry out due diligence and, if required, to arrange bid financing.
Prohibition of break fees and other deal protection measures
It has become common practice in the UK for potential bidders to require target companies, in the context of recommended offers, to agree to various deal protection measures. These include break fees, exclusivity undertakings, matching rights and implementation agreements. The Panel has previously expressed concern that such measures may deter potential competing bidders.
The proposals would introduce a general prohibition on “offer-related arrangements” of this sort. The prohibition would also extend to other arrangements between the potential bidder and the target company in connection with a bid, including arrangements relating to the purchase by the bidder of assets from, or to the provision by the bidder of finance to, the target company, which are not in the ordinary course of their respective businesses.
Confidentiality and non-solicitation undertakings, commitments to provide information for the purpose of obtaining regulatory clearance and agreements which only impose obligations on the potential bidder (e.g., a “reverse break fee”) would not constitute an “offer-related arrangement” for this purpose.
It is proposed that the Panel would be able to grant a dispensation from this prohibition to allow a company to enter into a break fee arrangement:
- with a prospective “white knight,” where the company is the subject of a hostile offer; or
- with a potential bidder who is participating in a formal auction process commenced by the target company,
provided that the break fee does not exceed 1% of the value of the target company, calculated by reference to the value of the competing offer.
The Panel has also indicated that it may grant a dispensation from the prohibition on “offer-related arrangements,” generally, where the target company is in such serious financial distress that its board is actively seeking an offer for it, and where a potential bidder is only likely to make an offer if such arrangements are entered into.
Where the offer is proposed to be implemented by means of a Court approved scheme of arrangement, the position is different. Unlike a conventional offer, a scheme of arrangement is a target company-driven process. The target company is required to propose the transaction to its own shareholders, and to convene and hold the necessary Court and shareholder meetings. To date, potential bidders have, in these circumstances, required the relevant target company to enter into an implementation agreement to regulate the implementation of the scheme of arrangement.
Under the proposals, such arrangements would also be prohibited as “offer-related arrangements.” To address the bidder’s legitimate desire to ensure that the bid is implemented in a timely and orderly manner, the Panel has proposed that where the target company recommends the offer and it is to be implemented by means of a scheme of arrangement, the target will be required to issue the scheme circular, proposing the scheme to its shareholders, within 28 days of the announcement of the offer, and to implement the scheme in accordance with the timetable set out in that circular, unless (among other things) it withdraws its recommendation.
Disclosure of bid-related fees and expenses
Under the proposals, the bidder and the target would be required to disclose in the offer document their aggregate estimated fees and expenses in relation to the bid, and, separately, the estimated fees and expenses of each of their advisers (including financial advisers and corporate brokers, accountants, lawyers and public relations advisers).
Bidders will also be required to disclose details of any fees and expenses which are payable in connection with the financing of its bid. This will need to be done on the basis that the bid will complete, and that the finance will be fully drawn down. Where there is a variable fee arrangement, estimates of the minimum and maximum amounts payable will need to be disclosed, and when a fee is uncapped, the amount disclosed will need to reflect a reasonable estimate of the fees which are likely to be paid.
Disclosure of financial information
Currently, less detailed financial information is required to be disclosed by a bidder in relation to a cash offer than a share offer.
Under the proposals the same financial information would, essentially, be required to be disclosed by bidders in all circumstances, subject to an exception for cash offers relating to disclosure of details of changes in the financial and trading position, which will not be required.
Disclosure of financing arrangements
At present, offer documents must include a general description of how the offer is to be financed, including details of the principal lenders or arrangers. Under the proposals, additional information would need to be disclosed, including, in respect of any debt facilities which have been entered into to finance the offer, the amount of each facility, the repayment terms, interest rates, any security provided and details of the key covenants.
In this context, the Panel has however recognised that private equity bidders may have complex financing structures, and, specifically, that the way in which equity is to be provided to the relevant bid vehicle may be commercially sensitive. Detailed disclosure of the latter would not be required.
All documents relating to the financing of the bid will be required to be put on display once the offer is announced, without redaction.
Providing greater recognition of the interests of the target company's employees
Some of the Panel's most important proposals are intended to improve the quality of disclosure by the bidder in relation to its plans for the target and its employees. Specifically:
- a bidder will be required to disclose its intentions with regard to the continued employment of the employees and management of the target company (including any material change in their conditions of employment), and to the locations of its places of business and of its fixed assets, or to make an appropriate negative statement; and
- statements in offer documents regarding a bidder’s intentions concerning such matters will be expected to hold true for at least one year from the date on which the offer becomes wholly unconditional (unless another period is stated).
The consultation also includes proposals to increase the ability of employee representatives to make their views known on the merits of a bid. These include requiring:
- the board of directors of the target company to inform employee representatives at the earliest opportunity of their right under the Code to circulate an opinion on the effects of the bid on employment;
- the target company to pay the costs associated with the publication of the employee representatives’ opinion, including the costs incurred by employee representatives in obtaining advice to verify the information in the opinion to the standards required by the Code; and
- the target company, if this opinion is not received by the target company in good time before its publishes its circular (in which case it will be appended to the circular in the normal way), to publish the opinion on its website and to announce that it has done so.