The Code Committee of the Takeover Panel (the "Panel") has recently undertaken a public consultation in relation to potentially significant amendments to the Takeover Code (the "Code"). The results of this consultation were published on 21 October 2010. Whilst some of the more draconian changes that had been under consideration will not be implemented (on the basis that they concern matters of company law and therefore can only be addressed properly by government), the consultation is likely to lead to significant changes to the Code which may fundamentally affect the way in which takeovers are undertaken in the UK.
The Panel sees its role very much as policing what should be a proper and reasonable balance between the conflicting interests of a bidder and a target in takeover bids. The recent public consultation resulted from a general feeling that, in recent times, the balance had shifted unfairly in favour of bidders. The Panel has concluded that this has indeed been the case. The Code Committee has therefore brought forward a number of proposals to amend the Code with a view to redressing the balance in favour of target companies. Other changes have also been proposed to the Code to improve the offer process and to take more account of the position of persons who are affected by takeovers in addition to target company shareholders.
The Code Committee's principal proposals are as follows (please click on each for further information, including a Bird & Bird commentary on the same):
- The introduction of a much stricter regime for avoiding a target company being placed under siege by a prospective bidder;
- A prohibition on inducement fee and other "deal protection" arrangements being entered into, save in limited circumstances;
- A requirement for increased transparency and improved quality of disclosure of transaction fees and the bidder's finances; and
- New provisions which afford greater recognition of the interests in the outcome of a bid of persons other than a target's shareholders (such as a target's employees and a bidder's shareholders).
The Code Committee has decided not to adopt proposals to increase the minimum acceptance condition requirement under the Code for an offer to be successful (currently '50% plus one') or to disenfranchise shares acquired during the offer period, citing the incompatibility of such changes with company law. It remains to be seen whether the Government will intervene in this area.
The detailed terms of the proposed revisions to the Code will be subject to the Code Committee's usual public consultation procedures and are therefore unlikely to come into effect until early 2011. However, the day to day approach adopted by the Panel in these areas in the intervening period is likely to move towards the practice expected to be introduced.
The introduction of a much stricter regime for avoiding a target company being placed under siege by a prospective bidder
The Code Committee has determined that virtual bids are unduly damaging to the interests of target companies. 'Virtual bids' involve the announcement of a potential offer, either made voluntarily or because of a leak, without any commitment on the part of the potential bidder and without any time period for the offer to be made. In practice, the vast majority of such announcements are made by the target following an approach and often, such announcements do not even identify the potential bidder.
Amendments are proposed to be made to the existing 'put up or shut up' regime to restrict greatly the use of virtual bids. Under the existing rules, a put up or shut up requirement will only arise if the target requests it once a possible offer becomes known. Furthermore, the period within which a bidder has been required to 'put up or shut up' has tended to be typically between six and eight weeks of the bidder's identity becoming known.
The proposed new rules contemplate that in any announcement of a possible offer, hostile or recommended (other than where it is merely the target board initiating an auction process to try and find a buyer), it will be necessary to name the potential bidder and that bidder will then have a maximum of four weeks within which to either announce a fully formulated and financed offer under rule 2.5 of the Code, or announce that it will not make an offer (and thereby be frozen out for 6 months). There will be a mechanism for an extension of this period by joint application to the Panel between the bidder and the target, though clearly this will only be available in recommended situations.
Simon Allport who leads Bird & Bird's International Public Securities Group (and is a former secondee to the Takeover Panel) comments as follows:
"The dynamic for both hostile and recommended offers is going to change significantly as a result of this change. For a hostile bidder with complicated bid terms (such as a paper offer which requires publication of listing particulars or the arrangement of underwritten financing) it is going to mean that there will be very limited time within which to finalise its terms once its interest is made public.
This will put much greater emphasis on the need to avoid any leak which would result in the bidder being forced into an early announcement. One can easily see that a target which is approached on a confidential basis may seek to take advantage of the new rules by finding its own way of leaking the approach, forcing an early announcement and thereby gaining the upper hand tactically by being able to put the bidder under pressure because of the fixed put up or shut up requirement."
A prohibition on inducement fee and other "deal protection" arrangements being entered into, save in limited circumstance
The Code Committee has taken a close look at deal protection measures and the factors that target company boards tend to take into account in giving their opinion and recommendation of an offer.
The Code Committee has noted that it has become market practice on most agreed bids for the target to agree to pay an inducement fee (of 1% of the value of the offer) if, having agreed to recommend an offer, the target board subsequently determines to withdraw its recommendation or if a third party offer is announced which ultimately succeeds. The inducement fee is typically accompanied by undertakings from the target company board to support the recommended bid and not to take action to support a competing bid, although there is usually a carve out to allow target directors to comply with their fiduciary duties.
The Code Committee has concluded that inducement fees are broadly detrimental to target company shareholders. Accordingly, the Code Committee is proposing that the Code should be amended to introduce a general prohibition on inducement fee agreements and on undertakings given to the bidder by the board of a target company. The only exceptions are for undertakings designed to protect the confidentiality of the bidder's information, to prevent solicitation of the bidder's customers or employees and to provide information needed to satisfy a condition to the offer or to obtain regulatory consent.
The Code Committee has also decided to clarify that target company boards should not consider themselves bound to made their recommendations based on the offer price alone. It is proposed that amendments will be made to clarify that the Code does not limit the factors that the target company board is able to take into account in giving its opinion on an offer, and that it is not bound to consider the offer price as the determining factor.
Simon Allport comments as follows:
"In what is a significant proposed change to the Code and market practice, the Panel has determined to prohibit deal protection arrangements completely, save for limited undertakings and for offers where the target has itself initiated an auction process to find a bidder.
The prohibition will extend to entering into any implementation agreement for the offer, something that has become a standard feature of bids which are implemented by way of a scheme of arrangement. The Panel recognises that the risks for a bidder of effecting an offer by way of a scheme of arrangement without an implementation agreement are significant (given that it is a target driven process). It therefore intends to introduce a requirement that a target board which recommends a bid which is being effected by way of a scheme of arrangement will be obliged to adhere to the timetable for that scheme agreed with the Panel and published in the scheme circular (unless the recommendation is withdrawn).
The increase in the number of offers effected by way of a scheme rather than conventional offer over the last ten years has largely been viewed partly as being as a result of bidders getting more comfortable that they are able to have a degree of control over the process by virtue of implementation agreements. It will be interesting to see whether this change will result in a swing back towards more offers being implemented by way of conventional offer.
The proposed changes to the Code which will encourage target boards to take into account a wider range of factors than just the offer price when deciding whether or not to recommend an offer are clearly designed to try and get the parties to offers to pay more than just lip service to the interests of other stakeholders in a target, such as customers and employees. It is interesting that whilst the Panel eschewed the option for increasing the acceptance condition beyond 50% on the basis that this was really more a matter for company law, the Panel has thought it appropriate to seek to express its views on what company law should require a director to take into account when giving a recommendation."
A requirement for increased transparency and improved quality of disclosure of transaction fees and the bidder's finances
The Code Committee has decided not to introduce a blanket prohibition on fees involving an incentive or success-based component, but instead to require that details of all fees payable by the parties (including the estimated minimum and maximum amounts payable as a result of any success, incentive or ratchet mechanism) should be disclosed in the offer document or circular (with a breakdown as between financial advisers, accountants, lawyers and PR advisers) and changes to the estimated amounts should be disclosed promptly by way of separate public announcement. This will not require the parties to reveal commercially sensitive information regarding the offer (for example where the size of a particular fee is linked to the particular value of an offer).
The Code Committee has also decided that information regarding the bidder, its group and its financing arrangements, which is currently only required to be disclosed in the context of a securities exchange offer, should be disclosed in all cases. The Code Committee believes that this information will be of use to target company directors (having regard to their duties under the Code and the Companies Act 2006), to bidder company shareholders and to employees, customers, creditors and suppliers of the bidder and target company. In addition, it is proposed that the offer documents include a pro forma balance sheet on the enlarged group and all relevant financing documents will need to be placed on public display.
Simon Allport comments as follows:
"It will be interesting to see what impact the new rules on fee disclosure will have on advisers' behaviour regarding fees incurred in bid situations. Such fees are often substantial and the increased disclosure could bring greater pressure to bear on bid parties to ensure that fee levels are proportionate and appropriate in the context of the transaction concerned. The other areas where additional transparency is required should not lead to a significant increase in the information to be included in offer documents, but it does demonstrate a move away from the traditional position of the Panel that it is primarily concerned with protecting the interests of target shareholders."
New provisions which afford greater recognition of the interests in the outcome of a bid of persons other than a target's shareholders (such as a target's employees and the bidder's shareholders)
The Code Committee has concluded that bidders should continue to disclose details of any plans regarding the target company's employees, locations of business and fixed assets (as currently required by the Code) and proposes to amend the Code to add a new requirement for bidders to make negative statements if there are no such plans.
In addition, the Code Committee believes that the Code should be amended to make clear that, except with the consent of the Panel, statements in offer documents regarding a bidder's intentions in relation to the target company and, in particular, the target company's employees, locations of business and fixed assets (or the absence of any such plans), will be expected to hold true for a period of at least one year following the offer becoming or being declared wholly unconditional (save where another period is stated).
The Code Committee also proposes to improve the ability of employee representatives to make their views known, by confirming that information about the offer can be shared with them in confidence, by requiring target company boards to inform employee representatives at the earliest opportunity of their right under the Code to circulate an opinion on the effects of the offer on employment and to clarify that it is the target company's responsibility to publish employee representatives' opinions at the expense of the target company.
Simon Allport comments as follows:
The proposed requirements to be more explicit about plans for the business and employees going forward means that it is unlikely to be sufficient going forward simply to say that employment rights will be fully safeguarded, which was something of an empty commitment anyway. The requirement that such statements should (in the ordinary course) be expected to hold good for at least 12 months begs the question as to the extent to which the Panel will seek to police this once offers have been concluded.
The further attempt to ensure the views of employees are heard is an interesting development. Some years ago as a result of intervention at the EU level, a change was made to the Code requiring that any statement made by employee representatives on the terms of an offer would need to be included in the offer document. However, this was little used, particularly in a recommended situation, because any such statement was never received prior to the offer document being published. The amended rules will require employees to be consulted earlier. Interestingly, this could increase the chances of a leak and an early announcement being required, bringing the new provision relating to "put up or shut up" more sharply into focus.