On 24 July 2013, the Code Committee of the UK Panel on Takeovers and Mergers (the Code Committee) published its Response Statement (RS 2012/1), following its consultation (PCP 2012/1) on proposals to amend the rules of the City Code on Takeovers and Mergers (the Code), the key changes relating to profit forecasts, quantified financial benefits statements and material changes in information.

The amendments to the Code introduced as a result of RS 2012/1 will take effect on 30 September 2013.

Overview of the existing regime

Rules 19 (Information)1 and 28 (Profit Forecasts) of the Code have been known to catch out the unwary takeover market participant (both bidders and target companies) and stymie their efforts to publish persuasive financial information during the course of a bid. The spirit behind the rule is fairly simple -- if a party choses to rely on statements which amount to profit forecasts or quantified statements about the financial benefits of a bid, in the course of their launch or defence of a bid, they will be subject to high standards of care in preparation of those statements -- as these are statements which are regarded as having particular importance and compelling significance on shareholders when considering whether or not to accept a bid.

In particular, the Code requires that "profit forecasts" as defined within the scope of the rule have to be formally reported upon (with the inevitable cost and timing implications). More frustratingly for some market participants is the fact that the rule extends, in certain circumstances, to profit forecasts which are already "on record" and/or which the party is required to publish during the offer period in compliance with their domestic financial reporting/disclosure requirements.  Further, the rules require parties to report on profit forecasts, estimates, valuations and so-called "consensus" numbers sourced by third party analysts which targets or bidders publish even though these numbers are prepared by third parties and are not necessarily endorsed by the relevant companies.

The Code Committee recognised a number of years ago that there was scope for relaxing the rules without prejudicing the paternalistic spirit in protecting shareholders. The Code Committee also considered that there were some aspects of the regime which needed to be tightened up, in particular, to cover financial statements which forecast cost savings or other financial benefits. Although it has taken a number of years for the Code Committee to introduce the changes (the first informal consultation commencing circa 2009, followed by the first formal consultation paper in 2010 and the second in 2012), the changes are welcome and have generally been well received by the market.

Key changes to the Code

In its public consultation paper (PCP 2012/1) published on 5 July 2012, the Code Committee proposed several amendments to the Code including:

  1. the introduction of a revised Rule 28 relating to profit forecasts, with the aim of applying more proportionate requirements, adopting a more logical framework for regulation and achieving greater consistency;
  2. the incorporation into Rule 28 of the current requirements of Note 9 on Rule 19.1 with regard to merger benefits statements (to be renamed as "quantified financial benefits statements") [NB; this is in part a change to form and order of the rules albeit it does have the impact of wrapping in requirements in relation to quantified financial benefit statements into the new requirements on reporting on profit forecasts]; and
  3. the amendment of Rule 27 in relation to the disclosure of material changes in information.

The Code Committee has, in most cases, adopted the amendments to the Code proposed in PCP 2012/1 as further outlined below.

New Rule 27 - Material changes in information

Following consultation with the respondents, the Code Committee has adopted the requirement for an offeror and the offeree company to promptly announce:

  1. any material changes in previously published information and
  2. any material new information which would have been required to be disclosed in any previous document published during the offer period, had it been known at the time (Rule 27.1(a)). 

This is a key change to the rules which previously only required material changes to be published if and to the extent a party published a subsequent document, as opposed to requiring disclosures on an iterative basis.

The Code Committee has not however done away with the requirements to update certain information in documents subsequently circulated by offerors or offerrees. It has expanded the list of specific items which should be disclosed if and to the extent there is any material change in them from that previously published. This is set out in the new Rules 27.2(b) and (c).

The new rule also makes it clear that the existing requirement to confirm the continuing validity of profit forecasts included in any subsequent documents published also extends to quantified financial benefits statements and asset valuations.

Profit forecasts, profit estimates and quantified financial benefits statements


The Code Committee has accepted the new definitions of "profit forecast", "profit estimate" and "quantified financial benefit statements". These definitions will be aligned to the equivalent provisions in the Prospectus Rules of the UK Financial Conduct Authority (FCA), with the exception of referring to a "financial period" instead of a "particular period" in relation to the definition of "profit forecast" and retaining the reference to audited results in the new definition of "profit estimate". The Code Committee has also adopted a note to the new Rule 28.1, clarifying that a statement described as a "target", "budget" or similar will normally be treated as a profit forecast, unless it is clear that the statement is no more than aspirational.

The Code Committee has also adopted the amendments to the definition of a "cash offeror" as, proposed in the PCP, and introduced a new definition of "securities exchange offeror" to mean an offeror (or potential offeror) other than a cash offeror.

Profit forecasts and quantified financial benefits statements published during an offer period -- Full Reporting Requirement

Reporting on statements during an offer period generally - The Code Committee has accepted most of its proposals relating to the preparation of statements in accordance with Rule 19.1 with the highest standards of care and accuracy and taking care that information is adequately and fairly presented. The Code will continue to impose the reporting and other requirements which currently apply, under Rule 28 and Note 9 on Rule 19.1 respectively, to profit forecasts and merger benefits statements made during an offer period.

Assumptions and bases of belief - In addition to publishing the assumptions behind the profit forecast reported on (as previously required), the new rule also requires the bases of belief for quantified financial benefit statements to be clearly set out in accordance with the requirements of new Rule 28.4.

Accounting bases - With regard to accountants' reports, the Code Committee has accepted that the statement "the basis of accounting used is consistent with the accounting policies of the party to the offer" would not be appropriate in the case of a quantified financial benefits statement.

Extension of reporting requirements to remove exemption for recommended offers - The Code Committee continues to believe that the new Rule 28.1(a) should apply to all quantified financial benefits statements published by a securities exchange offeror or the offeree company, and that the exemption from the requirements of Note 9 on Rule 19.1, which currently applies where the offer has been recommended by the board of the offeree company, should no longer apply.  Rule 28.1(a) will apply to a quantified financial benefits statement in the same manner that it applies to a profit forecast.

Profit forecasts published following an approach or following the first active consideration of an offer -- Full Reporting Requirement

The Code Committee has confirmed its belief that the reporting requirements of Rule 28 should continue to apply to profit forecasts published following an approach but prior to the offer period, subject to its conclusions in relation to "ordinary course profit forecasts".

Profit forecasts published by offeror following the first active consideration of an offer and prior to an approach -- Directors' confirmation, withdrawal or new fully reported profit forecast

Having considered comments received from respondents, the Code Committee has concluded, on balance, that the safeguards of the new Rule 28.1(c) (which introduces the concept of"directors' confirmations" regarding validity rather than a full reporting requirement -- see below) will sufficiently address the situation where a potential offeror has published a profit forecast after its first active consideration of a possible offer, but prior to its approach to the offeree company.

Profit forecasts published by offeree before an approach with regard to a possible offer Directors' confirmation, withdrawal or new fully reported profit forecast

A new Rule 28.1(c) has been adopted by the Code Committee, which contains similar requirements to those set out in chapter 13 of the Listing Rules for profit forecasts published prior to the publication of a class 1 circular. The offer document or offeree board circular must:

  1. repeat the profit forecast and include a statement by the directors that it remains valid and has been properly compiled (Directors' confirmation); or
  2. include a statement by the directors that the profit forecast is no longer valid, with an explanation of why that is the case (Withdrawal); or
  3. include a new profit forecast for the relevant period and reports from its reporting accountants and financial advisers (New fully reported profit forecast).

Ordinary course profit forecasts

With regard to the proposed requirement for an ordinary course profit forecast to have been made "in accordance with an established practice", the Code Committee considers that the Panel should take all relevant factors into account in deciding whether to treat a profit forecast as an ordinary course profit forecast. Instead of giving parties a carte blanche on so-called "ordinary course" profit forecasts, the Panel has adopted a cautious approach. The Code Committee has introduced a new definition of "ordinary course profit forecast" and confirmed that the requirements of the new Rule 28.1(c) should apply where the offeree company or a securities exchange offeror has published an ordinary course profit forecast prior to the commencement of an offer period, but following an approach to the offeree company.

Profit forecasts for future financial periods -- some flexibility from full reporting requirements

The Code Committee has accepted its proposal to give the Panel the ability to grant a dispensation from the reporting and other requirements of Rules 28.1(a) and (b), where a profit forecast published by the offeree company or a securities exchange offeror relates to a period ending more than 15 months from the date on which the profit forecast was first published2. The Code Committee has further adopted a new Rule 28.2(b) and note stating that, except with the consent of the Panel, if during the offer period the offeree company or securities exchange offeror either publishes for the first time or repeats a profit forecast, the document or announcement must include a corresponding profit forecast for the current financial year and for each intervening financial year.

Management buy-outs and offers by controllers

The Code treats MBOs and offers by controlling shareholders differently, recognising that these bidders have or have had access and information regarding the target which places them in a more informed position. Accordingly, the Code takes a slightly stricter approach with MBO offerors and in line with this has adopted a new note on Rule 28.1 stating that where the offer is a management buy-out or similar transaction, the Panel will not normally grant a dispensation from the requirements of Rule 28.1(a) or (b) with regard to any profit forecast for a financial period ending 15 months or less from the date on which the profit forecast is first published. Where such profit forecast was published before it received an approach, the offer document will normally be required to repeat the profit forecast and include the reports from its reporting accountants and financial advisers.

Dispensation from Rule 28 -- profit ceilings and "immaterial" exchange offers

The Code Committee has accepted its proposal to allow the Panel the ability to grant a dispensation from the requirements of Rule 28 with regard to profit ceilings and where the consideration securities will not represent a material proportion of the offeror's enlarged share capital or alternative or a material proportion of the value of the offer.

Compilation of Profit Forecasts and Quantified Financial Benefits Statements

The Code Committee has adopted a revised version of the proposed note 7 to Rule 28.1 as a new Rule 28.3, stating that any profit forecast or quantified financial benefit statement must be properly compiled and prepared with due care and consideration, be understandable, reliable and comparable.

Profit Estimates which are mandated under relevant UK regulations

The Code Committee has adopted a new Rule 28.5 which states that Rule 28.1 does not apply to a profit estimate included in a preliminary statement of annual results which complies with the relevant provisions of the UKLA Rules, a half yearly financial report compliant with the UKLA, AIM Rules or ISDX Growth Market Rules or an interim management statement or other interim financial statement prepared in accordance with IAS.

Investment Analysts' Forecasts

If a party publishes a consensus investment analysts' forecast on its website, in accordance with certain information requirements, this will not be treated under Rule 28.7 as a profit forecast, however it will be necessary to comply with certain conditions including making it clear that the company has not reviewed or endorsed the forecast.


The changes to the Code should be welcomed as a sensible relaxation of the Code requirements in specific circumstances, in particular in relation to some parts of the revised Rule 28 which materially reduce reporting requirements on profit forecasts relating to a future period or which were published before the approach or in the ordinary course. The changes adopted in the Response Statement have made the Rules more proportionate, logical and consistent as a whole.