Changes likely to increase transparency in public takeover bids

Prompted by the new Securities Market Act that entered into force on 1 January 2013, the Securities Market Association has in December 2013 published a revised Helsinki Takeover Code, which will enter into force on 1 January 2014 (http://cgfinland.fi/files/2013/12/helsinki-takeover-codeweb.pdf). The revised Helsinki Takeover Code will replace the Recommendation Regarding the Procedures to be Complied with in Public Takeover Bids (the old Takeover Code) published by the Panel on Takeovers and Mergers in 2006.

The Panel on Takeovers and Mergers was abolished in connection with the reform of the Securities Market Act and the new Takeover Board of the Securities Market Association is now tasked with the drafting and updating of the Helsinki Takeover Code. The Takeover Board can also issue statements in individual questions relating to the interpretation and application of the Helsinki Takeover Code. Roschier Partner Paula Linna and Senior associate Mia Mokkila acted as secretaries to the working group that was responsible for drafting the revised Helsinki Takeover Code.

  1. What has changed in comparison to the old Takeover Code? 

The old Takeover Code of 2006 was by nature non-binding self-regulation, whereas the obligation to comply with the new Helsinki Takeover Code of 2013 (the “Takeover Code”) is based on a so called “comply or explain” -principle. This means that the parties to a takeover bid (the target company and the offeror) have a statutory obligation under the Securities Market Act to confirm whether they comply with the Takeover Code, and to publicly explain if they are not committed to complying with the Takeover Code or some of its individual recommendations. The offeror shall normally publish this in connection with its announcement of the takeover bid and the target company in connection with its board of directors’ statement on the takeover bid.

To reflect this change in the nature of the Takeover Code, the structure of the Takeover Code has been revised. The Takeover Code is divided into fourteen individual recommendations that are subject to the comply or explain –principle. In addition, there is an introduction and explanatory notes to each such recommendation describing the relevant rules and regulations and best practices relating to the recommendation in question. The introduction and explanatory notes are not subject to the comply or explain –principle, but it is naturally not possible to deviate from the practices described in such sections to the extent the relevant obligations derive directly from law or other applicable rules and regulations.

In connection with the revision, the number of actual recommendations has been significantly reduced, even if the purpose has been to keep the substance of the Takeover Code reasonably similar to the old Takeover Code (with necessary changes deriving from amendments in legislation and evolvement of market practice). The wordings of the actual recommendations have also to a large extent been rephrased to make them suitable for the comply or explain-principle.

As a result of the comply or explain -principle, the target company and the offeror are now in certain situations under a more extensive obligation than previously to publicly disclose matters relating to their actions in a takeover situation. The revised Takeover Code is thus likely to increase transparency on the market. Some examples of potential increased transparency situations have been described below.

It should, however, be noted that the disclosure obligation under the comply or explain -principle is usually only triggered once a takeover bid has been announced. If an approach by an offeror to a target company does not result in an announcement of a takeover bid, there will generally be no need to explain why a certain recommendation has not been complied with. However, for example the target board will always need to be prepared to publicly explain its actions for the event that the offeror would go hostile and announce a takeover bid regardless of whether the target board is willing to recommend the acceptance of the takeover bid.

  1. Examples of increased disclosure obligations under the revised Takeover Code

Prohibition to commit to exclusivity arrangements

According to Recommendation 3 in the Takeover Code (Contractual Arrangements with the Offeror), the target board must not agree to any contractual arrangements that limit the company’s and the board’s possibilities to act, such as different kinds of exclusivity arrangements. In other words, should the target board decide to enter into an exclusivity arrangement with an offeror, the board has an obligation to explain to the market why this has been done. Sometimes it may, however, be justified for the target board to commit to a limited negotiation prohibition (so called “non-solicitation commitment” whereby the board agrees to refrain from actively seeking competing bids but can react to an unsolicited competing proposal) provided, among other things, that such commitment is temporary and in the interest of the company’s shareholders. A case-by-case analysis on the contents of any such commitment will usually be required to assess whether the commitment needs to be explained as a deviation from the Takeover Code.

Obligation to allow a due diligence review

According to Recommendation 6 (Due Diligence Review in the Target Company), if the target board has received a proposal on a takeover bid that is of a serious nature and that the board deems to be in the interests of the shareholders, the target board shall allow the offeror to conduct a due diligence review concerning the target company. The recommendation increases the obligation of the target board to carefully consider whether to allow an offeror to conduct a due diligence review, as in order to be able to decline such a request, the board should be able to conclude that the takeover proposal is not of a serious nature or not in the interests of the shareholders. The target board would also need to be ready to explain to the market the reasons why the board declined due diligence access in the event that the offeror would announce a hostile bid.

Recommendation 7 (Due Diligence Review Regarding the Offeror) sets a somewhat similar obligation for the offeror to allow a due diligence review to the target company in case securities are offered as consideration. Due diligence should be allowed by the offeror, and also conducted by the target company, to the extent required for the target board to reasonably assess the consideration offered. If the offeror would not allow or the target company would not conduct a due diligence, they should be able to publicly explain why a due diligence was not necessary. Factors that could be considered in such context could relate e.g. to the stock exchange listing of the security offered as consideration, to information publicly available on such security and to the liquidity thereof.

Obligation to afford equivalent treatment to all offerors of a serious nature

According to Recommendation 8 (Measures of the Target Company in the Event of a Competing Bid), the target board shall afford equivalent treatment to all offerors of a serious nature, e.g. when allowing access to due diligence information. Even if it is still possible for the target board to take into account various offeror specific considerations, such as competition law aspects, the recommendation will increase transparency as the target board is under an obligation to explain e.g. in case it has not allowed equal access to information to all serious offerors (where circumstances have otherwise been substantially similar). Together with Recommendations 3 and 6 presented above, Recommendation 8 will increase the obligation of the target board to carefully consider how to respond to different approaches by potential competing offerors.