On 1 June 2010 the Code Committee of the Takeover Panel published its consultation document setting out some potentially radical changes to the Takeover Code. The Panel received an unprecedented number of responses given the significance of the issues raised. At the heart of the consultation was the question of whether in certain respects takeover bids, in particular hostile takeover bids, should be made harder in the UK market.
Our summary of the Panel's response is available here, providing details of the specific issues addressed by the Code Committee.
Some thoughts and implications for bidders, targets and their advisors are set out in this e-bulletin.
The "Big Three" radical changes initially considered
The initial consultation contemplated three significant and radical ideas. These were:
- disenfranchisement or suspension of voting rights in respect of shares in a target acquired during an offer period. This was mooted in response to the assertion that hedge funds and others with short term investment objectives buy into companies which are the subject of takeover speculation and that those investors inevitably support a sale of the company at whatever price, to ensure some level of profit or at least loss mitigation, rather than support the company continuing on an independent basis;
- the proposal that the acceptance condition for takeovers be raised above the 50 per cent plus one current level. This was raised with a view to the possibility of setting a higher hurdle for changes of control; and
- requiring offeror shareholders to approve the making of a takeover offer.
We welcome the Panel's conclusion that none of these should be implemented (at least, in the Panel's view, absent significant company law changes).
As the Panel has pointed out, the disenfranchisement of shareholders cuts across the principle of equality of treatment of shareholders. It has been widely recognised that those who buy into a company which is the subject of a takeover offer are only able to do so because the existing shareholders have chosen to sell. Presumably if they have chosen to sell, often at a price below the offer price, they would also in any event have accepted an offer at that price.
In respect of the proposal to raise the acceptance condition, the Panel has concluded that this is not workable whilst the company law threshold for voting through an ordinary resolution (e.g. to remove a director) is by majority vote. The Panel has pointed out a range of other problems with this proposition, including the difficulty of a board continuing where a clear majority of shareholders do not support their desire to maintain independence. Whilst one can focus on the practical difference between a 50 per cent plus one positive vote and acceptances over more than 50 per cent of the total issued voting share capital of a company, the linkage between the ordinary resolution threshold and the current acceptance condition is in our view logical and justified. We share the Panel's view that there are likely to be routes around such an increased acceptance condition, if introduced.
As regards a possible requirement for offeror shareholder approval of takeover offers, the Panel concluded "on balance" that this was not appropriate. In our view the imposition of a requirement for offeror shareholder approval is wholly misconceived: it would run the risk of creating a shareholder approval requirement for relatively small transactions, from the perspective of an offeror, and in circumstances where other comparable transactions using different structures or in different jurisdictions require no such approval. It seems to us that the issue of offeror shareholder approval is a matter for offeror constitutions and governance arrangements and not for the Takeover Panel. Insofar as the debate is about requirements where offerors are UK listed companies, these are already subject to the class tests under the Listing Rules, requiring shareholder approval for certain substantial transactions. So again we strongly endorse the Panel's conclusion on this.
Toughening up on hostile offers
Contrary to general expectations amongst market participants, the Panel has announced two particular changes which we see having a material impact on hostile takeover activity in the UK. These are:
"Virtual bidder" constraints
It is now proposed that if there is a leak about a potential offer and a Rule 2.4 "possible offer" announcement is issued, the identity of the potential offeror must be disclosed (as opposed to the current situation where this is not always required).
In addition, the potential offeror will have an automatic four week deadline within which it must either pull out or make a formal bid. There will be scope, by agreement with the target, for applying to the Panel for an extension, but consent will rest with the Panel.
This is a significant change. It seems to us that it will increase materially the need for potential bidders in many cases to have prepared themselves to launch a bid before they approach a target. They run the risk, absent such preparation, of not being able to launch a bid within the four week window which will be imposed if their approach leaks.
There will be debate about whether this will in turn encourage targets to leak bid approaches, particularly where they do not believe that a bidder will be able to be ready within the timetable. Whilst that risk may exist in some cases, it seems to us that in general targets wish to avoid being put into play by public disclosure when they receive an approach; accordingly, overall we believe this measure is likely to incentivise parties further towards avoiding leaks. Add to that the FSA's recent further crackdown on leaks of bids and we may eventually start to see some reduction in the level of pre-bid announcement disclosure.
Complete ban on inducement fees and deal protection measures
Whilst consultation raised the issue of deal protection, this measure goes much further than the Panel's original thoughts. The sort of measures which, under this new regime, would be outlawed would include:
- any inducement fees from targets;
- so called "matching rights" whereby a target agrees to give a first bidder the opportunity during a short window of time to match any subsequent bid, before recommending the subsequent bid;
- so called "no shop" and "no talk" restrictions;
- constraints on change of recommendation by the target board; and
- any constraints on supply of information to a second bidder
- The only exception to these will be where the target has initiated a process to auction itself.
Different market participants will have different views on the importance of these measures to takeovers in recent years: clearly they are measures that bidders have been pleased to be able to negotiate, as they have assisted their positions. Those that see themselves as potential target companies are likely in general to be more welcoming of the new restrictions. For some private equity and other financial buyers, there is no doubt that this will increase the impediments to public takeovers in the UK.
It is also envisaged that targets will not be able to commit to a bidder to meet a particular timetable for a scheme of arrangement, but instead the Panel will agree an appropriate timetable with the target and will ensure the target's compliance with it. Whether this will reduce the use of schemes as the structure of choice for UK takeovers remains to be seen, but our expectation is that the Panel will oblige targets in general to proceed swiftly to implement schemes. Even with a contractual offer, where ostensibly a bidder controls the timetable, contested situations tend to default to extended timetables and the same will presumably also happen if there is intervention by a new bidder post an initial offer by scheme.
Given that break fees will not be available to a bidder which is concerned that its offer may be trumped by a subsequent bidder, it will also be interesting to see whether at least in relation to cash offers where share purchases are permitted, first bidders will be keener than perhaps they have been to date to stakebuild in targets prior to or at the time of launch of a transaction, subject of course to relevant market abuse and insider dealing rules.
Next Steps and Implementation
The Panel has indicated that it will publish one or more detailed consultation papers in due course on the detailed rule changes. We assume that there will be enthusiasm for proceeding with this as quickly as possible and that given this will be a follow up consultation, there may be less time made available to consultees than on a standalone consultation process. Whilst the Panel will doubtless treat any further review as a proper consultation, it must be unlikely that there will be significant changes from those announced today, given the degree of thought and consideration and public interest already taken in these issues.