Following the October 2010 response to its initial consultation paper, the Takeover Panel (Panel) has recently closed the consultation period on its detailed proposed amendments to the Takeover Code (Code). The initial impetus for the proposed amendments was driven, in part, by the controversial takeover in 2010 by Kraft Foods of Cadbury and the political and media storm that arose when Kraft announced that it was to close Cadbury's Somerbury factory, having previously stated that it would be keeping the factory open.
The Code governs takeover bids, merger transactions and other transactions which have the objective or potential effect of obtaining or consolidating control of:
- companies whose registered offices are in the UK, Channel Islands or the Isle of Man and whose securities are admitted to trading on a regulated market in the UK or on any stock exchange in the Channel Islands or the Isle of Man;
- public and certain private companies whose registered offices are in the UK, Channel Islands or the Isle of Man and which are considered by the Panel to have their place of management and control in any of those places; and
- to a certain extent, to UK companies admitted to trading on a regulated market elsewhere in the European Economic Area and certain companies whose registered office is in a member state of the European Economic Area and whose shares are admitted to trading on a regulated market in the UK.
The Panel has acknowledged that the Code in its current form has become too favourable to hostile bidders and should also take more account of those persons (principally employees) other than offeree company shareholders who are affected by takeovers and so it is seeking to strengthen the position of the offeree company. Here are the principal amendments.
1. Increasing the Protection for Offeree Companies Against Protracted "Virtual Bid" Periods
"Virtual bids" take place where a potential bidder indicates interest in the target company but does not commit to an offer. Such bids often prolong the acquisition process and create uncertainty for the potential target company and its shareholders. The Panel is proposing that:
- following its initial approach, a potential bidder should be named in any announcement which commences the offer period, regardless of which party is making the announcement; and
- any potential named offeror must clarify its intentions towards the target within a strict 28 day period following the date on which it is named. This 'put up or shut up' deadline would be automatically imposed, in contrast to the current situation where the Panel will only impose a deadline at the request of the target company's board.
The Code in its current form does not require announcements by offeree boards to name the potential bidder. The Panel believes that the new rule requiring identification of the potential offeror will motivate offerors to maintain greater levels of secrecy and has suggested that it will be beneficial for offeree company shareholders to identify the offeror from an earlier stage as the identity of the potential offeror may help them to form a judgment as to whether a formal bid will be forthcoming. The Panel has also pointed out that, where the existence of a potential bid is leaked, it can cause material damage and disruption to the target whilst having no effect on an anonymous potential bidder. By setting a rigid deadline for announcement, the Panel hopes that the proposed changes will balance matters up and will encourage bidders to maintain confidentiality and to launch formal bids in accordance with Code timetables.
The "put up or shut up" proposal has probably been the most strongly criticised of all the current proposed amendments. Critics argue that the time period is too short for certain kinds of bidders, such as private equity firms, who often need time to arrange leveraged financing and who have lengthy due diligence requirements. Unless such a bidder could convince the board to allow it an extension it would be barred from bidding for another six months. The Panel appears, however, to have discounted this objection.
2. Strengthening the Position of the Offeree Company
As part of its general intention to "rebalance" the Code and to strengthen the position of offeree companies, the Panel is proposing to:
- impose a general prohibition on deal protection measures (that is, measures generally protecting the position of the offeror) and inducement fees; and
- clarify that offeree company boards are not limited in the factors they may consider when giving their opinion on an offer.
At present, a range of protection measures are common, including exclusivity agreements, board undertakings to recommend a particular bidder, "implementation agreements" (committing the offeree company to implement a bid, or to refrain from taking action which may facilitate a competing bid) and 'force the vote' provisions (requiring target boards to submit the deal to a shareholder vote even where it no longer supports the offer). The Panel has noted that target company boards are often presented with a standard package of protection measures (including break fees at the maximum level) which they feel obliged to agree to, and that this practice can even occur where an agreement has been reached following a hostile "virtual bid".
Under the proposed changes, a potential offeror will still be able to ask the target company board to enter into confidentiality arrangements, information provision agreements, non-solicitation agreements relating to the offeror's employees and limited irrevocable undertakings to accept the offer. Furthermore, target companies will still be permitted to agree break fees of up to 1% of the offer price to a "white knight" which has come in after a hostile bid has been announced, to a bidder where the offeree company has put itself up for sale in a formal sale process and, with dispensation from the Panel, where a potential offeree is in such severe financial straits that it is seeking a rescue offer.
Some market participants have expressed concern that private equity bidders in particular might be discouraged from starting a bid process if they will lose their costs if the potential target withdraws from talks. Furthermore, the weakening of implementation agreements (as described above) for schemes of arrangement may also discourage bidders from taking this route. However, in recognition of this, the Panel is intending to require offeree boards to agree with it a timetable for the implementation of schemes and then to comply with such timetable, subject to the withdrawal of the board's recommendation.
With respect to the factors that offeree boards take into account in deciding whether to give a recommendation to an offer, the Panel has also noted that there is a perception among some market participants that the board is bound by its obligations under the Code to consider the offer price as the determining factor in giving its opinion and deciding whether to recommend an offer. As a result the Panel's intention is to insert a note into the Code explaining that price need not be the determining factor and that the board may take into account any factor they believe to be relevant. Many remain sceptical, however, as to whether offeree boards will ever move away from a fixation with price, regardless of what the Code suggests, particularly where the price is payable in cash as opposed to shares or other securities of the offeror.
3. Increasing Transparency and Improving the Quality of Disclosure (to Offeror and Offeree Shareholders)
There are two key proposed measures here:
- both parties to an offer will be required to disclose offer-related fees and expenses; and
- the offer document will require greater disclosure of financial information regarding the offeror.
The Panel is proposing that both the offeror and the offeree board should set out an estimate of aggregate fees in the offer document and should also disclose advisory fees separately according to the category of advisor. Fees in respect of financing are to be disclosed separately to advisory fees. The boards should also reveal maximum and minimum amounts payable to their advisors as a result of any success, incentive or ratchet mechanism. Finally, boards must advise their shareholders of any material changes to the initial estimates they provide: in this sense there is a continuing obligation.
The Panel has also concluded that offeree shareholders are not the only party with an interest in a detailed analysis of the financial position of the offeror: the offeror's shareholders, directors and employees may also be concerned. Under the proposed changes, the offer document will require detailed information about the offeror's financial position. This will be regardless of whether the offer is a cash offer or a securities exchange - under the existing Code a cash offer reduces the burden of financial disclosure.
In particular, the offer document will, whether the offer is a cash offer or a ecurities exchange offer, now require detailed information about:
- any debt financing the offeror is depending on (including the name of the provider, the security provided, key covenants and the interest rates); and
- the ratings outlooks of both parties.
These disclosure requirements are entirely novel to the Code and have generally been well received though some critics are concerned that increased scrutiny over the costs of specialist fees could detract attention from the value of a potential bid in the eyes of offeree shareholders.
4. Providing Greater Recognition of the Interests of Offeree Company Employees
Following Kraft's volte-face on its commitment to keep Cadbury's Somerbury factory open and the ensuing impact on Cadbury employees, the Panel has acknowledged that the Code does not adequately protect the interests of affected parties other than the offeree company shareholders. Its proposals aim to improve:
- the quality of disclosure by offerors and offeree companies in relation to the target's employees; and
- the ability of employee representatives to make their views on a bid known.
As the Code currently stands, offerors are required to make a statement of intentions as regards the target's employees. Under the proposed changes, they will have to specify extra details such as their intentions as regards the maintenance of any existing trading facilities. Offerors will also need to make a negative statement if they do not intend to make changes to the employment circumstances of the target company and it will not be acceptable to abstain from commenting on the issue.
The proposal which may raise the most alarm, however, is the requirement that any of the offeror's statements made during an offer period regarding employment and the target's business locations should generally hold true for a 12 month period following the date when the offer becomes unconditional (save where another period is specified). This requirement is to be incorporated as a note rather than a rule. This amendment addresses the issue of offerors going back on their word, something which is surely considered inequitable by most. However, the bidder of tomorrow might understandably be concerned that compliance with the proposal could prevent it from reacting to unforeseen changes of events or making post completion decisions that will improve its new business.
Currently, offer documents should include the opinions of employee representatives. Under the proposals, the offeree will need to inform its employee representatives of the earliest date at which they can circulate an opinion on the effects of the offer on employment. Once produced, the offeree will need to publish this opinion on its website. A final proposal is for the offeree company to cover any reasonable costs incurred by employee representatives in obtaining any advice they need to verify the information in their opinion.
This proposal has not been as widely reported as others and is perhaps considered unobjectionable. However, it is easy to see how the idea of paying for financial or even legal advice for employee representatives might concern future target companies in spite of the Panel's claims that these costs will not be large.
It would be trite simply to say that we will have to wait and see how these changes will play out once they come into force later this year, but it would not be unreasonable to say that they will have an impact at least on the early stages of bids. We suspect that the new requirements will force bidders to be more organised and advanced in their bid preparations before approaching their target. Inevitably, they will need to incur greater costs at an earlier stage than at present and may find it difficult to find financing in the available time. In a weak M&A environment, we are concerned that some bidders, particularly private equity bidders, might be dissuaded from entering the arena. Although the changes are intended to improve the position of offeree companies, they may have the unintended consequence of harming the interests of offeree company shareholders, something the Panel surely would not want. Watch this space!