Substantial changes to the UK Takeover Code will take effect on 19 September 2011. The changes follow the UK Takeover Panel's review of takeover regulation in the wake of the Kraft's takeover of Cadbury last year.
One of the Panel's aims in making the changes is to rebalance the rules in favour of target companies as it believes that hostile bidders have enjoyed too many tactical advantages over targets in recent years.
Introduction to the UK Takeover Code
The City Code on Takeovers and Mergers (the UK Takeover Code or the Code) governs the conduct of mergers and takeovers in the UK and applies where there is an acquisition of control of a UK public company which is listed on the UK Official List or of any other UK public company (including one whose shares are traded on AIM) which has its place of central management and control in the UK.
It is the status of the company to be acquired (the target) that determines whether or not the UK Takeover Code applies, rather than that of the acquiring company (the bidder).
The Takeover Panel is the body that administers and enforces the Code.
Background to the review of the UK Takeover Code
The takeover of Cadbury by Kraft in 2010 triggered significant public debate in the UK, in particular around whether the regulatory regime meant that it was too easy for a hostile bidder to gain control of a target in the UK.
Following extensive initial consultation, the Panel concluded that, whilst it should not proceed with certain radical proposals it had originally put forward, it needed to make significant changes to the UK Takeover Code relating to:
- virtual bids
- deal protection measures and
- increased disclosure of fees and financing arrangements
The Panel published a detailed consultation paper in March this year and then issued the final rules at the end of July. The new rules come into force on 19 September 2011. Despite lobbying from a number of market participants, the Panel has not made any substantial amendments to the proposals contained in its March consultation paper.
Protection for targets against long virtual bid periods
The Panel concluded that target companies should be given greater protection against protracted "virtual bids" (where a potential bidder announces that it is considering making an offer for a particular target but does not commit itself to doing so).
Under the new regime:
- When a target first announces that it has received an approach about a possible offer (often required by rumour and speculation in the market) an offer period will start. The target will have to name the potential bidder whose approach has leaked and also name any other potential bidder with which the target is in talks or which has made an approach to the target which has not been rejected (irrespective of whether that potential bidder has been identified in any press rumour or speculation). There is no scope for the target to choose not to name any such potential bidder.
- If an offer period commences with an announcement by a potential bidder (whether made voluntarily or as a result of a leak), the target does not need to announce whether any other potential bidder has made an approach to it unless there is a leak. If, however, the target chooses to announce the existence of another potential bidder, it must name it.
- Once a potential bidder is named in an announcement, it will then have a strict 28 day "put up or shut up" (PUSU) deadline by which it must announce either a firm intention to bid or that it is not going to make a bid.
- If, as the deadline approaches, the bidder has not yet finalised its bid preparations, the target (but not the bidder) can ask the Panel to extend the deadline.
- If, after the initial announcement about a bid approach, another potential bidder approaches the target, there will be no requirement to announce the identity or existence of that bidder unless there is a leak. If a subsequent potential bidder is named in an announcement, that bidder will then have a 28 day deadline from that announcement by which it must put up or shut up.
The only general exemption from the new 28 day deadline will be when the target has initiated a formal process to sell itself by public auction.
This new requirement to name potential bidders and the automatic imposition of a 28 day PUSU deadline is likely to have a significant impact in practice, particularly as regards bid tactics. Critics have argued the rules could deter bidders who are only interested in a recommended deal and who want to test the water with the target before they progress to any detailed planning.
Bidders will be concerned that even a preliminary approach could result in them being disclosed as a potential bidder and make them subject to a 28 day deadline by which they must decide whether to make an offer. At the end of the 28 days, unless the target agrees to seek an extension to the deadline, a bidder which wishes to proceed with an offer will need to have finalised its bid preparation and in particular have put in place its financing arrangements. Under the UK Takeover Code, a bidder is effectively committed to making an offer once it announces a firm intention to make a bid.
Maintaining confidentiality after an approach will therefore become far more important. Bidders are also likely to want to complete more of their bid preparation before approaching a target.
Prohibition of deal protection measures
In order to reduce the tactical advantages that bidders have obtained over target companies, and to redress the balance in favour of the target company, the Panel is introducing a general prohibition on break fees and other deal protection measures in favour of the bidder, other than in certain limited cases. The Panel said that these have become standard packages which the target board is often under considerable pressure to accept, even following a hostile bid if it becomes recommended. There are also concerns that such packages deter other potential bidders.
There will therefore be a complete bar (subject to the exceptions described below) on "any offer-related arrangement" between the target and the bidder. This will prohibit all deal protection measures (for example, no shop restrictions and matching rights), inducement fees and work fee arrangements.
The only "offer-related arrangements" that are outside the scope of the prohibition are:
commitments in relation to confidentiality;
- non-solicitation agreements covering employees, customers and suppliers;
- commitments to assist in obtaining regulatory clearance;
- irrevocable commitments and letters of intent given by the directors of the target in their personal capacity;
- obligations imposed only on the bidder e.g. a reverse break fee or standstill agreement; and
- agreements relating to any existing employee incentive arrangement.
Beyond these types of arrangement, any other arrangements or agreements that the bidder and the target company may enter into in connection with an offer will generally be prohibited, unless they are trading agreements in the ordinary course of business.
The Code provides for an exemption from the prohibition in two scenarios:
- A "white knight" situation, that is where a hostile offer has been announced and one or more preferred competing bidders emerge. The target may agree a break fee (but no other offer-related arrangement) with the preferred bidder(s) when they announce a firm intention to make an offer.
- An auction situation, that is where the target announces a formal sale process. Again, the target may agree a break fee (but no other offer-related arrangement) with one preferred bidder when it announces a firm intention to make an offer.
In each case, any break fees must be no more in aggregate than 1% of the value of the offer and payable only if a competing offer becomes or is declared wholly unconditional.
The ban on deal protection measures will have a significant impact, particularly for private equity bidders. They will no longer (except in limited circumstances) be able to have the comfort that their costs will be covered if their bid is unsuccessful as a result of the emergence of a successful competing bidder, nor will they be able agree other measures with the target to protect their deal from any potential competing offer.
Disclosure of financial information
Previously, less detailed financial information was required on cash offers compared to share offers and where a cash offer was structured so that no target shareholder could remain a minority, the disclosures on the financial situation of the bidder were largely dispensed with. The Panel has concluded however that financial information on a bidder is of interest not just to target shareholders where bidder securities form part of the offer consideration, but also to target employees and bidder shareholders. Therefore detailed financial information will now have to be disclosed on all offers, regardless of whether they are in cash or securities. The Panel believes that, as almost all of the required information will have been previously published by the bidder or target, this should not be unduly onerous. There will also be a new requirement to disclose ratings provided by ratings agencies and any changes to these ratings during the offer period.
Disclosure of bid financing
The bidder will be required to disclose more detail about its financing, including commitment fees, repayment terms, interest rates and key covenants. The financing documents will also need to be displayed without redaction on a website from the time of the announcement of the firm intention to make an offer.
The Panel has confirmed that it will normally grant a dispensation to permit a bidder not to disclose any headroom in the facility for a revised offer. Private equity bidders are given comfort by the Panel that they will not need to disclose their equity structures in detail (eg the identity of their general or limited partners).
Disclosure of intentions regarding the target company and its employees
The Code currently requires the bidder to state what its intentions are in relation to the targets' employees, locations of business and fixed assets. Under the new Rules, there will be an express requirement for the bidder to include a negative statement in the offer document if there are no plans in relation to them. This, combined with the new position on statements of intention (see below), is likely to require a bidder to give more careful consideration in future as to what it is willing to say about matters such as employees.
Statements of intention
Under the new Rules, any public statement of intention relating to any course of action to be taken after the end of the offer period must be adhered to during the time period stated or, if none is stated, for at least 12 months from the date that the offer becomes wholly unconditional, unless there is a material change of circumstances.
Disclosure of advisers' fees
Under the new rules, each of the parties must set out an estimate of aggregate fees in the offer document and also disclose separately estimated fees broken down by category of adviser (for example, financial advisers, lawyers, accountants). Financing fees must be disclosed separately from advisory fees.
The need to maintain confidentiality prior to announcing an offer is likely to become of paramount importance to potential bidders and the timing of any approach will require careful consideration because of the new put up or shut up rules. The prohibition on inducement fees and other deal protection measures will also need to be taken into account and will mean in particular that bidders will generally not be able to have their costs covered in the event that their bid is unsuccessful.