Summary and implications
In June 2010 following the political fall-out over Kraft’s takeover of Cadbury, the Code Committee of the Panel on Takeovers and Mergers (the Panel) published a public consultation paper seeking comments on a variety of proposals to amend the Takeover Code. The stated aim was to look at changes to the Code that would aid offeree companies in defending against hostile takeovers. The decision to embark on the consultation was made in light of widespread commentary and public discussion on various aspects of the regulation of UK takeovers.
The Code Committee has now reported on those proposals which it will be looking to implement and confirmed which ones it feels are either inappropriate or outside the Panel’s remit.
The key amendments to the Code to reduce the tactical advantages for hostile bidders are:
- Virtual bids: The identity of a potential bidder must be announced at the commencement of an offer period and, where there is a publicly announced potential offeror, the period between an announcement of a possible offer and the making of a firm offer or withdrawal will be limited to four weeks.
- Statement of intent: Offerors will be required to state their intentions in relation to the business of the offeree and then to stick to those statements for at least 12 months following completion of the offer.
- Disclosure: All Offerors will be required to disclose financial information about themselves in offer documents, including details of their debt structures and deal-related fees.
- Deal Protection: Surprisingly, deal protections are to be prohibited, including inducement fees, other than in a limited number of cases.
While the Code Committee has rightly shied away from some of the suggestions put forward in its original consultation papers, such as raising the minimum acceptance condition above 50 per cent plus one share, there are a number of changes which will cause concern amongst advisers on Code transactions, including the prohibition on inducement fees and four week fixed period between announcing an intention to make an offer and announcing the making of the offer.
The proposals in more detail
Public auction processes
Some of the amendments, such as prohibiting deal protection measures and introducing a mandatory four week period between announcement of a possible offer and the making of the offer, will not apply when the offeree company has “initiated a formal process to sell the company by means of a possible auction”. The Code Committee has not elaborated on what it will regard as such a formal process or a public auction. This will be one of the key amendments which advisers on Code formatting will be waiting to see the detailed wording for.
a ) Virtual Bid period shortened
Under Rule 2.2 of the Code, an offeree is obliged to make an announcement of a possible offer in certain circumstances. There is no fixed period between when that first announcement is made and when a subsequent announcement of an offer must be made. The Code Committee is proposing that, except with the consent of the Panel (following a joint application by the offeror and offeree), a maximum period of four weeks will be permitted between the making of the announcement of the identity of a possible offeror and the announcement of a firm offer under Rule 2.5 (or a statement that no offer will be made). The Code Committee have also proposed that an announcement of a possible offer should name the possible offeror. These changes will substantially increase the pressure to maintain confidentiality in an offer process for as long as possible to avoid an offeror being put in the difficult position of having to make its fully financial offer within a compressed four week period or declare that it is not bidding. By increasing the provisions to maintain confidentiality, the Code Committee proposals also reflect the concerns expressed by the FSA over the level of secrecy surrounding takeover offers. The Code Committee does not expect these announcement requirements to apply where the offeree has initiated a formal auction process.
b) Statement of broader intentions
Offerors will be required to detail in offer documents their intentions for the offeree companies following completion of the takeover in much more detail than at present. It is expected that this will involve offerors having to include details on which operations of the business will continue, what will happen to employees and fixed assets and what changes will occur as a consequence of the takeover. Offerors and their advisers will be particularly concerned about the proposed requirements that these stated intentions “will be expected to hold true” for a period of one year from the offer becoming unconditional, unless the Panel otherwise consents.
Offer documents will be required to provide more detailed financial information about the offeror itself, including information about its debt structure and, in some cases, a pro forma balance sheet for the combined group. Concerns around the fees charged by advisers will be addressed by requiring the disclosure of the estimated fees of all of the offeror’s advisers, broken down by category of adviser.
d) Inducement fees and other deal protections
On e of the most controversial of the proposed changes is the prohibition of inducement fees and other deal protection measures, including non-solicitation undertakings. Despite the fact that a majority of respondents to the Panel’s original consultation favoured retaining such measures, the Code Committee has concluded that inducement fees and other deal protection measures have become standard “packages” which do not serve their original purpose of incentivising the offeror to make the offer but instead deny offeree shareholders the possibility of considering a competing offer and lead to competing offers being made on less favourable terms.
The affects of this change are likely to be most heavily felt in the case of public-to-private transactions where largely financial investors rely on the inducement fees to underwrite a large part of their abort costs if the offer fails. The one area where deal protection measures may still be permitted is where the offeree initiates a public auction process.
e) Guidance for directors
A concern has been raised that directors of offeree companies often believe that they are obliged to consider only the price offered by the offeror in evaluating the offer made. The Code Committee is recommending that the Code should be clarified to make it clear that this should not be the only consideration and that wider concerns could and should be taken into account. The proposed working of the Code, once announced, will be of particular interest to Rule 3 advisers to the offeree board.
What will not be changed
a) Raising the acceptance condition
The Code Committee was clear in its view that the acceptance condition should not be raised above 50 per cent plus one. This would not be consistent with UK company law given that shareholders owning more than 50 per cent of the shares in issue in the capital of a company could pass an ordinary resolution.
b) Disenfranchising shares during an offer period
Removing the rights of shareholders who have acquired shares during the period of the offer was felt by the Code Committee to be unworkable whilst UK company law does not support such an action.
c) Disclosure threshold
The Code Committee considered that reducing the disclosure threshold for Rule 8.2 disclosures from 1 per cent to 0.5 per cent would be of no value in controlling the making of offers for listed offerees.
d) Shortening the offer timetable
Having given consideration to reducing the period of time the offeror has to send offeree shareholders a formal offer document, the Code Committee decided that this was unlikely to provide any further protection to offeree shareholders.
Further consultation papers are expected to be published shortly, seeking views on specific proposed changes to the Code. Following the completion of this consultation exercise, the final changes to the Code are expected to be published.