The Takeover Panel has now released its response statement setting out the final results of its recent consultation on proposed changes to the City Code (RS2011/1). The proposed changes, which will take effect on 19 September 2011, will make takeovers of UK listed companies significantly more difficult, in particular by:
- providing greater protection for target companies against "virtual bids";
- prohibiting most deal protection measures and inducement fees;
- requiring greater disclosure in relation to the financing of bids and related fees and expenses; and
- introducing measures intended to properly recognise the interests of a target company’s employees in relation to a potential bid.
The Panel's approach on the key proposals has not materially changed since the most recent consultation paper was issued in March, but the response statement clarifies certain features of the new rules. These are summarised below.
'Put up or shut up' requirements
The Panel had proposed that target companies should be required to identify potential bidders in any announcement which commences an offer period; and that potential bidders should "put up or shut up", by either making a firm offer, announcing that it does not intend to make a firm offer or, together with the target, obtaining the Panel's consent to an extension, within 28 days of that announcement.
In the response statement, the Panel has made it clear that where there are multiple potential bidders the target company will be able to ask the Panel either to impose different deadlines on different bidders, or the same deadline on each of them.
The Panel has also confirmed that the rule requiring target companies to announce the extension of a "put up or shut up" deadline will only require them to 'comment' on the anticipated timetable and on the status of the negotiations, rather than to provide details. This reflects concerns in relation to disclosure of commercially sensitive information.
Statements of intention not to make an offer
The Panel has made clear that the proposed changes to the rules relating to statements by a bidder that it does not intend to make an offer are not intended to change the circumstances in which a potential bidder should be able to set aside such a statement. (Generally speaking, when a bidder indicates it does not intend to make an offer it will then not be able to do so for a period of six months.)
As a result, the Panel's consent will only be required in order for a bidder to change its position relating to the making of an offer, following a statement that it does not intend to make an offer, when that bidder is seeking to set its statement aside on the grounds that there has been a "material change of circumstances".
The Panel has also confirmed that a switch by another potential bidder from a bid by way of a scheme of arrangement to a contractual (tender) offer will normally be considered to be a "material change", but that a switch from an offer to a scheme is unlikely to do so.
Prohibition on deal protection measures and inducement fees
The Panel has confirmed that the proposed prohibition on deal protection measures will apply on a merger of equals or a reverse takeover.
The Panel has decided to carve out agreements relating to existing employee incentive arrangements from the general prohibition on deal protection measures, on the basis that the target company's board should be able to agree with the potential bidder how to exercise its discretion under such arrangements. The Panel has also decided to carve out inducement fee arrangements which are entered into with more than one white knight where a firm offer announcement has been made by a hostile bidder, if the aggregate amount payable does not exceed one percent of the value of the bid.
The Panel has declined to permit undertakings given by the target company to provide information to a potential bidder as to satisfaction of offer conditions or to notify material changes in the conduct of its business after the announcement of the offer. It is, however, clear that on a recommended offer the Panel would expect the target company to do this in any event.
Schemes of arrangement
One of the main changes which had been proposed is to require that where a target company implements an offer by way of a scheme of arrangement it must be done in accordance with the timetable published in the scheme circular, subject to the target company being able to withdraw its recommendation and, if it does so, terminate the scheme process.
In the response statement the Panel has indicated that a target company can make changes to the published timetable without the bidder's consent. This is to prevent a bidder who no longer wants to proceed from taking advantage of delays in the timetable by refusing its consent. To ensure fairness to bidders, they may, however, include in the timetable a long stop date by which the scheme must have become effective and specific dates for the shareholder meeting to approve the scheme proposals, and for the court hearing to sanction the scheme. These must be more than 21 days after the date which appears in the published timetable.
Negative statements regarding the bidder, the target company and their employees
In its consultation, the Panel had proposed to require a bidder to make an appropriate negative statement if it does not intend to make any changes regarding the bidder, the target company or their employees.
In the response statement the Panel has made it clear that any such statement should be as detailed as possible on the basis of the information which is known to the bidder at the time.
The Panel has also made clear that while it may be legitimate for a hostile bidder who has not had an opportunity to carry out full due diligence on a target to state that its business will be reviewed once it has gained control it must disclose its business rationale for making the bid. Statements of a general nature are unlikely to be acceptable where the offer is recommended and where it has been able to carry out due diligence. Compliance with this requirement, which will apply to all bids (and not just hostile bids), will require careful thought by the bidder.
The new arrangements will apply to all offers and possible offers from 19 September 2011.
On 1 July 2011, the Panel published "Guidance Regarding the Publication and Implementation of Code Amendments" outlining how some of the new provisions will apply to offers that are "live" at the time.