On September 19, a number of amendments to the United Kingdom City Code on Takeovers and Mergers (Code) came into effect. The Code governs the acquisition of UK, Channel Islands and Isle of Man-registered companies listed on the Main Market of the London Stock Exchange, and other such registered public companies (including those listed on the AIM market of the London Stock Exchange), whose place of central management and control is in any of those jurisdictions.
The revised Code applies to all offers and possible offers from September 19, 2011. In summary, the revised Code introduces provisions which:
- shorten the "virtual bid" period to increase protection for target companies;
- prohibit "offer related arrangements" (i.e. deal-protection measures and inducement fees) except in certain limited cases;
- increase transparency and improve disclosure; and
- provide greater recognition of the interests of target employees.
Shortening the "Virtual Bid Period"
In recent years, a prevalent tactic by bidders has been to make public statements indicating a possible offer for a target, thereby commencing an "offer period" under the Code, the effect of which, until the potential offer is formally withdrawn, is to place significant restrictions on the way in which the target management may defend itself and conduct its business (the Code restricts "frustrating action" by a target), as well as, tying up the target and its management in dealing with the possible offer. These tactics have proved a low-cost way for bidders to test the market without having to make a formal Code offer; to the detriment of the target and its shareholders. The target’s defence has always been, after a certain period of time has elapsed, to apply to the Panel on Takeovers and Mergers (the Panel) to issue a "put up or shut up" (PUSU) order to the potential bidder, requiring it to announce a firm intention to make an offer by a specified date, or to withdraw. The period from the announcement of a possible offer to the expiry of a PUSU order (i.e. the period during which a target is "in play" and subject to speculation and restrictions on its activities) has varied, but can be in the region of 70 days.
The revised Code swings the tactical balance back in favour of the target. Any possible offer announcement (which the target can make following an approach by a potential bidder, and which the bidder cannot, under the Code, prevent or which may be required in circumstances of a leak or significant movements in share price) must now name the potential bidder and automatically sets a 28 day PUSU deadline in respect of such party (subject to extension which may be agreed between the target board and the Panel towards the end of the period). Accordingly, bidders will need to observe greater secrecy in their bid planning, and undertake a greater degree of bid preparation, than before.
Prohibition on Deal Protection Measures
In its consultation exercise, the Panel considered that deal protection measures (including a break fee of one per cent of the offer value) had become a standard package that target boards were under pressure to accept, tending to frustrate competing offers rather than acting as an inducement to make an offer, as originally intended. Accordingly, the revised Code prohibits (except with the consent of the Panel), the bidder and target entering into any "offer-related arrangements" (including inducement fees or comparable arrangements), except in certain limited circumstances (such as a "white knight" inducement fee, not to exceed one per cent of the offer value and payable only if a competing offer becomes unconditional, and a break fee of the same amount, payable to the final bidder in an auction process).
The revised Code requires:
- itemised disclosure of bidder and target offer-related expenses (including financing fees);
- disclosure of the same financial information regarding a bidder as is required of the target, regardless of whether the offer is a cash or securities offer;
- a description of how the offer is to be financed and sources of finance.
Recognition of the Interests of Target Employees
The revised Code requires a bidder to state its intentions with regard to the future of the target’s business and the long-term justification for the offer, as well as, with regard to employees, location of the business and use of fixed assets. A key amendment is that unless there has been a material change in circumstances, such statements (plus any statements by the bidder or the target made at any other time during the offer period), must hold true for at least 12 months from the date the offer becomes wholly unconditional (or until another date, if specifically stated).
The revised Code definitively establishes that price need not be the determining factor for a target board to consider in recommending an offer. It also includes certain provisions enabling target employee representatives to be more effective in providing their opinion on the effects of the offer on employees.