When the Takeover Code was substantially amended on 18 September last year, the Code Committee stated its intention to review the operation of the changes no less than a year after their implementation. Panel Statement 2012/8 sets out the conclusions of such a review carried out in respect of the year ended 18 September 2012. For more information on the 2011 changes, click here.
Overall, the Code Committee concludes that the 2011 changes have operated satisfactorily. However, it has identified a number of areas where it has asked the Panel Executive (the "Executive") to monitor areas of practice and keep provisions under review. These relate to:
- the formal sale process (sales by auction);
- the downing tools regime;
- the prohibition on deal protection measures and, in particular, the use of "co-operation" agreements and directors' irrevocable commitments; and
- the disclosure of market flex provisions in debt facility agreements.
We set out below the key points to note from the statement, and look in more detail at the areas identified as being kept under review.
Public identification of bidders – certain fears unfounded
During the consultation on the 2011 changes, some expressed concern that the requirement for bidders to be publicly named might deter a significant number of potential bidders from approaching target companies. Whilst the Code Committee states that it is difficult for it to assess whether potential bidders have been so deterred, it notes that there was no significant reduction in the level of bid activity in the review period, as compared with the previous 12 months.
In addition, some respondents to the consultation argued that a requirement for bidders to be publicly named might result in well-prepared potential bidders leaking details of their possible offer in order to force the target company to make an announcement. This is because such an announcement would also have had to identify any competing bidder who had approached the target. If the competing bidder was less well-prepared, it could be put at a disadvantage by being named earlier than it would otherwise want to be. However, the review indicates that this concern does not appear to have been realised.
Greater secrecy and fewer leaks
A key objective of the 2011 changes in imposing a mandatory 28 day "put up or shut-up" (PUSU) period on publicly named potential bidders was to encourage parties to an offer to keep matters confidential. The Code Committee welcomes the fact that, in the year ended 18 September 2012, there was a significant increase in the proportion of offer periods which commenced with a firm offer announcement, and a significant decrease in the number of offer periods which commenced following an untoward share price movement or rumour and speculation with regard to a possible offer. Whilst the Code Committee admits that it is difficult to establish a direct link between the Code changes and the increase in the number of offer periods commencing with a firm offer announcement, it concludes that the figures do suggest a connection.
Formal sale processes
The 2011 Code changes introduced the ability for a target company to announce that it is initiating a formal sale process. In the year to 18 September 2012, 18 targets took advantage of the facility leading the Code Committee to conclude that the mechanism is a valuable addition to the options available to targets. However, the Code Committee believes that it is too early for it to make a full assessment of the operation of formal sale processes. It does not, therefore, propose to introduce any further amendments to the Code in relation to formal sale processes at present, but has asked the Executive to keep practice in this area under review. It notes that, in due course, this may result in the Executive publishing a Practice Statement and/or in the Code Committee bringing forward proposals for additional provisions with regard to formal sale processes, including, for example, in relation to the circumstances in which a formal sale process may be initiated.
This desire to keep the position under review may well be linked to the fact that various dispensations (notably a dispensation from potential bidders having to be publicly named and subject to the mandatory PUSU regime, and a dispensation from the prohibition on inducement fees) are available when the formal sale process route is used. The Panel is no doubt keen to ensure that the process is not abused.
The 2011 changes formalised the practice relating to "downing tools". Under the new provisions, a potential bidder can avoid being publicly identified if it confirms to the Panel that it will cease actively to consider making an offer for the target company. The "bidder" is then subject to certain restrictions as regards making future bids. Whilst the Code Committee offers no comment on how the practice has worked (other than some statistics as to its frequency of use), it is worth noting that it has asked the Executive to continue to monitor the operation of this practice and keep the process under review.
Deal protection measures and inducement fees
Unsurprisingly, perhaps, this is the area where parties to an offer appear to have had the most difficulty in adhering to, or interpreting, the new rules.
Overall, the Code Committee believes that the general prohibition on “deal protection measures” and inducement fees has achieved its objectives. However, it is noted that, in certain cases, parties to an offer and their advisers have failed to observe the general prohibition on deal protection measures. In particular, parties and advisers have included, or sought to include, in so-called “cooperation" or similar agreements, certain provisions which go beyond those which the Executive considers to be permissible under the narrowly defined exclusions provided in Rule 21.2(b). These have included:
- an obligation to cooperate to “implement” the acquisition of the target company by the bidder;
- an agreement by the target company to extend the long-stop date of a scheme of arrangement, if so requested by the bidder;
- warranties in relation to information, due diligence, share capital etc;
- commitments by the target company to produce scheme documentation within a particular time period and not to publish documents without the bidder's approval; and
- restrictions on the target company’s ability to make announcements and to communicate with shareholders and others in relation to the offer.
Additionally, it is noted that there have been a number of cases where target company shareholders who are also target directors have entered into irrevocable commitments with a bidder under which they have not only agreed to accept the offer (or, on a scheme of arrangement, vote in favour of the relevant resolutions), but also agreed to other provisions which, except with the consent of the Panel, are prohibited. Examples given are where target directors' irrevocable commitments have included:
- agreements not to solicit a competing offer from other potential offerors;
- commitments to recommend the bidder's offer to target company shareholders; and
- undertakings to notify the bidder if the director becomes aware of a possible offer by a potential competing bidder.
Whilst the Code Committee continues to believe that it should be permissible for target company shareholders who are also target directors to enter into irrevocable commitments to accept an offer (or vote in favour of a scheme of arrangement) with a bidder, it understands that the Executive interprets Rule 21.2(b)(iv) as meaning that it is not permissible for offeree company directors to enter into agreements, commitments and undertakings of the type described above.
As a result, the Code Committee has asked the Executive to monitor the operation of Rule 21.2 and understands that the Executive will take appropriate remedial and disciplinary action in the event of its becoming aware of any breach. In addition, it is noted that the Code Committee may, in due course, wish to consider the continuing appropriateness of the list of agreements, arrangements and commitments which are excluded from the general prohibition.
Disclosure of information – market flex provisions
Overall, the Code Committee considers that the amendments with regard to the disclosure of financial information have worked well and continues to believe that it is important that shareholders and other readers of offer documentation are provided with information as to how an offer is to be financed. However, the Code Committee understands that the Executive has, in certain situations, granted dispensations from the disclosure requirements under Rules 24.3(f) and 26.1(b) in the case of “market flex” provisions in debt facilities.
In certain cases, debt facility agreements entered into in order to finance offers include market flex provisions under which the arrangers of the debt may, in specified circumstances, vary certain terms of the financing within defined limits in order to facilitate its successful syndication. In a number of cases, it has been put to the Executive that the requirements of Rules 24.3(f) and 26.1(b), under which a bidder would normally be obliged to disclose the limits set out in such market flex provisions, could have the effect of increasing the bidder's financing costs. This is because potential syndicatees may negotiate their participation in the syndicate on more favourable terms if they know the maximum extent to which the lead arrangers have the ability to flex the relevant terms.
The Code Committee understands that, in a small number of cases, the Executive has granted a limited dispensation from Rule 26.1(b) and has consented to the market flex arrangements not being published on a website by no later than 12 noon on the business day following the announcement of a firm offer, thereby providing the lead arranger with an opportunity to syndicate the debt in the period of up to 28 days before the offeror is required to publish its offer document. In such cases, if the debt is syndicated by that time, the terms upon which the debt is being provided must be described in the offer document, and the final form of the financing documents must be published on a website, but the Executive will not require the market flex arrangements (which will no longer be relevant) to be so described or published. However, if the debt is not syndicated by that time, the market flex arrangements will have to be described in the offer document and the full terms then published on a website.
The Code Committee continues to believe that the disclosure of flex terms is a necessary element of the disclosure of offer financing and has asked the Executive to keep practice in this area under review.
Disclosure of intentions
The rules relating to the disclosure of the bidder's intentions for the target and its workforce were revised as part of the 2011 changes, with the intention of improving the quality of disclosure. Whilst it is noted that there has been an improvement, the Code Committee points out that it is disappointed that in many cases disclosures have been general, and not specific, and that, for example, a number of offerors (including bidders who have secured a recommendation from the offeree company board) have sought to satisfy the requirements by stating that their intention is to undertake a review of the offeree company’s business following completion of the takeover.
The Code Committee takes the opportunity to make the point that:
- where non-specific comments are made and the bidder subsequently takes action, such as making a significant number of employees redundant, which was not referred to in the offer document, the Executive will wish to investigate whether the bidder had in fact envisaged such action at the time the offer document was published, and if it concludes that it had, it will be likely to consider it a serious breach of the Code; and
- where a party to an offer takes action contrary to its stated intentions within the12 month period provided for by the Code, the Executive will consider whether to instigate disciplinary action.
It is not clear how the Executive will interpret the reference to "envisaging" action – does this mean, for example, that, if a bidder's financial advisers have made a rough calculation of synergy benefits which are assumed to involve some workforce shrinkage but without any specific plans having been formulated, the bidder needs to be concerned that it could be open to attack if it fails to include specific comment about this possibility in the offer documentation? It would be helpful to have further clarity from the Panel about how firm the expected action needs to be in order for specific mention to be needed.
The fact that the Code Committee reiterates the above points underlines the high regard in which the principles are held by the Panel. It may, therefore, be that we see increased focus on this area, and, although it is not one which the Code Committee identifies to be kept under review, it is possible that further changes may be introduced if practice does not develop in the way that the Panel envisages.
The Code Committee notes that following the 2011 changes, the number of employee's representatives' opinions that were either appended to offer documents or subsequently published on websites increased. It therefore concludes that the 2011 changes have gone a long way to achieving their objectives of improving communications between offeree companies and their employee representatives and of enabling employee representatives to be more effective in providing their opinion on the effects of an offer on employment.
In addition, the Code Committee notes that it does not believe the enhanced rights of employees and employee representatives have resulted in disproportionate burdens being placed on target companies. In light of the Panel's recent consultation on extending the same sort of rights to pension trustees (PCP 2012/2), one wonders if this is an opportunity to smooth the way for such changes or whether we can truly take some comfort that any future changes are unlikely to result in an unduly onerous workload.
The general view is that the changes to the Takeover Code which were introduced last year have been effective in achieving the Panel's express aim of restoring an equal playing field as between bidder and target. The report by the Code Committee provides evidence that market participants have been able to adapt to the new regime without too much difficulty.