On 26 November 2012, the Panel on Takeovers and Mergers (the Panel)1 issued a statement (the Statement) in which it reviewed the changes it had made to the City Code on Takeovers and Mergers (the Code)2 in September 2011 (the Amendments). Statistics were provided in the Statement, from which tentative conclusions can be drawn as to whether the Amendments reduced deal flow or materially altered the manner in which bidders have been approaching public bids in the UK.
In short, the Amendments do not seem to have stifled bid activity, but have had the intended effect of empowering bid targets more, at the highly sensitive time at the start of possible bid talks, and reducing the tactical advantage of offerors over offerees.
1. The 2011 Amendments
1.1 The objectives of the Amendments had been to:
1.1.1 Increase protection for offeree companies (Targets) against protracted “virtual bid” periods (i.e., situations in which a potential offeror announces that it is considering making an offer but does not commit itself to doing so), by requiring potential offerors to be named in (early) target announcements and by the introduction of a short deadline requirement on the part of the potential offeror to either announce a firm intention to make an offer, or announce that they will not be making an offer, by the 28th day following the day on which they were identified (known as a “put up or shut up” (PUSU));
1.1.2 Strengthen the position of Targets by prohibiting deal protection measures and inducement fees (with limited exceptions), redressing the balance in favour of Targets;
1.1.3 Increase transparency and improve the quality of disclosure, by requiring the disclosure of offer-related fees, and require disclosure of financial information in relation to the offeror and the financing of an offer (including full debt documents); and
1.1.4 Provide greater recognition of the interests of Target employees by improving the quality of disclosure as to the offeror’s intentions in relation to the Target and its employees (such as redundancies and rationalisation), as well as improving the ability of employee representatives to make their views known exercising their existing right to publish an opinion on the bid.
2. Success of the 2011 Amendments in Practice - Bid Activity
The Statement provides statistics for the year ended on 18 September 2012, and in most cases comparable statistics for the prior year . Selected statistics are set out in the below table:
Click here to view table.
3. Key Areas of Code Reform - Results
3.1 Target Protection Against Virtual Bid Periods
The Panel believes that the Amendments relating to “virtual bids” have worked well, citing: a lack of evidence of Targets having been put under siege for protracted periods since the Amendments; in fact a significant reduction in 2012 compared to 2011 in the proportion of offer periods which began with the announcement of a “possible offer”; and an increase in 2012 over 2011 in the proportion of offer periods which commenced with the announcement of a firm offer.3 The statistics as to “possible” versus firm offers are in fact the only ones to have moved significantly in 2012 compared to 2011.
3.1.1 Identification of potential offerors
Under the Amendments, a Target must now, when it announces an approach, name the potential offeror (if the approach was not unequivocally rejected by the Target board). This requirement was intended to remove the advantage of anonymity previously enjoyed by some potential offerors (previously Target boards had the contentious decision to make whether or not to give the name). The Panel notes in the Statement that there was no significant reduction in bid activity for the year ended 18 September 2012 (102 offer periods commenced, against 109 in 2011; of which marginally more were hostile - 12 at the date of announcement (9 in 2011)), implying that these Amendments did not, in fact, act as a deterrent to bid activity. It also notes the significant comparative reduction in offer periods commenced following public speculation and rumour, suggesting that the Amendments have contributed to the Panel’s aim of reducing the leakage of information in relation to possible takeover bids (which can cause the Target to be obliged to announce an approach, triggering a “virtual bid”).
3.1.2 Put up or shut up requirement
The Amendments require that by the end of the 28th day following the date on which a potential offeror was first publicly named, that potential offeror must either announce a firm intention to make an offer, or must announce that it does not intend to make an offer. The Panel believes that this firm PUSU provision has been a success and that it has given the Target the ability to control the duration of the period of uncertainty and disruption following announcement of a possible offer. The Statement also clarifies that the Panel will normally consent to an extension to the PUSU deadline at the request of the Target board. On no occasion during the year ended 18 September 2012 did the Panel refuse such a request . 18 extensions were granted by the Panel in the year ended on 18 September 2012, while extensions were not sought in relation to a further 28 potential offers. 39 offer periods commenced in the year ended 18 September 2012 in relation to which PUSU deadlines were set.4 Prior to the Amendments, the Target board had to decide whether or not to request the panel for a PUSU deadline.
3.1.3 Formal sale process
Under the Amendments, the Panel can grant a dispensation from the firm PUSU deadline where, prior to a firm offer announcement being made, the Target announces that it is seeking one or more potential offers by means of a formal sale process. In the year ended 18 September 2012, there were 15 offer periods which commenced with the announcement by the Target of a formal sale process. The Panel believes that this mechanism has shown itself as a valuable addition to the options available to Targets.
3.2 Deal protection measures and inducement fees
3.2.1 The Amendments included (with few exemptions) a prohibition on all deal protection measures and inducement fees during an offer period or when an offer is reasonably in contemplation. This includes for example break fees, matching rights and target warranties, implementation agreements and similar between the offeror (or any person acting in concert with it) and the Target (or any person acting in concert with it). Permitted measures include confidentiality obligations, assistance for the purpose of obtaining regulatory clearance, and non-solicits of customers, suppliers and employees. In addition, the Panel can permit a break fee (up to 1% of the offer value) from Target to a successful competing offeror or to one offeror in a formal sale process - there were no cases in the year after the Amendments of such consent being requested, bar one in a formal sale process.
3.2.2 The Statement points out that “cooperation agreements” and similar types of arrangements are still regularly being entered into by offerors and Targets, and that there has been significant failure to adhere to the new prohibitions on deal protection measures by including various cooperation obligations of Target. It also points out that Target company directors have been, in some cases, entering into irrevocable commitments to accept an offer (of itself, a permitted exemption) which included prohibited commitments as well, such as non solicitation of competing bids and recommendation obligations. The Statement clarifies how the Panel interprets the relevant amendments, and just how limited the exemptions from the deal protection prohibition in fact are.
3.3 Disclosure of financial and other information
As a result of the Amendments, the offeror now has to describe how the offer will be financed, including details of the debt facilities or other instruments entered into in order to finance the offer, and those finance documents must be published (put on display) on a website very shortly after a firm offer intention is announced. This rule change attracted a lot of attention when first proposed, the concerns being centred on loss of confidentiality of sensitive financing terms. Dispensations from the obligation to put on display have been granted by the Panel in a small number of cases in which “market flex” provisions were contained in debt facilities.5 This is because disclosure of the limits of the market flex provisions could have the effect of increasing the offeror’s financing costs.6
3.4 Disclosures in relation to offeree employees
3.4.1 As a result of the Amendments, if an offeror or Target 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 or such other period as is specified in the statement, or until there has been a material change of circumstances.
3.4.2 The Statement sets out the Panel’s disappointment that whilst there has been an improvement in the quality and detail of disclosures of intention made by offerors, in many cases disclosures have been general and not specific.7 The Statement reiterates the Panel’s view that any statement of intention by an offeror should be as detailed as possible, on the basis of the information that is known to the offeror at the time the statement is made and that the offeror’s fundamental business rationale for acquiring the Target should be disclosed as fully as possible.8
3.4.3 The Amendments also provided representatives of Target employees with a stronger platform (at target cost) for effectively sharing the opinions of the employees with Target boards.9 There was already an entitlement to give an opinion on the bid, but not a great deal of use had been made of that right. In the year ended 18 September 2012, 18 employee representatives’ opinions were published in respect of 10 separate offers. Of these, 9 employee representatives’ opinions were appended to Target board circulars in respect of 5 offers - this represented a significant increase since the right was introduced in 2006. 9 employee opinions in respect of a further 5 offers were published on a website.
While the Amendments were being considered, many commentators felt that some of them would stifle deal activity as the amendments were deliberately Targetfriendly, would require more discipline and early preparation by a potential bidder, and required additional (potentially sensitive) disclosure to be made. The need for potential offerors to be well-prepared and well-organised prior to making an approach to a Target board has indeed been heightened and potential offerors need to be ready to move at a good pace with a firm offer (and offer documentation). However, the statistics in the Statement do not seem to reflect the fear of less bid activity, which is particularly striking in light of the prevailing economic conditions which have resulted in suppressed levels of M&A. The added clarity as to the manner in which the Panel is applying and interpreting the Amendments is also helpful to practitioners.