On 21 March 2011 the UK Takeover Panel’s Code Committee (the Code Committee) published a consultation paper (PCP 2011/1) setting out proposed changes to the City Code on Takeovers and Mergers (the Code). PCP 2011/1 follows on from the responses to consultation paper PCP 2010/2, which had been prompted by concerns in relation to the conduct of public takeovers in the UK following the acquisition of Cadbury plc by Kraft Foods Inc in 2010. PCP 2011/1 now sets out the proposed changes to the Code.
The chief objective of the proposed changes is to redress the perceived “tactical advantages” to bidders over target companies, to the detriment of the target company and its shareholders, in hostile takeover situations (Kraft’s offer for Cadbury was initially hostile). The issues raised were that: (i) it is too easy for ‘hostile bidders’ to succeed; and (ii) short-term investors have too much influence over the outcome of offers, particularly hostile ones. The proposed changes fall into four categories.
Increasing Protection for Target Companies Against Protracted ‘Virtual Bid’ Periods
The amendments to the Code will require potential bidders to clarify their position (so called “put-up-or-shut-up”) within 28 days of being publicly identified, limiting the virtual bid period to which a target company may be subject. This will avoid the growing tendency of bidders to announce a possible offer without any commitment to make an actual offer. The Code will be amended so that the potential bidder’s name is made known in the announcement commencing the offer period, regardless of which party makes the announcement, and that within 28 days of the start of the offer period the potential bidder must either: (i) announce a firm intention to make an offer; (ii) announce that it will not make an offer (in which case the Rule 2.8 restrictions apply); or (iii) make a joint application with the target company board to extend the 28 day deadline.
The requirement to name the bidder and the fixed 28 day period to put up or shut up will not extend to auction sales initiated by a target. It will also not apply where a bidder announces a firm intention to make an offer for a target.
The changes are intended to ensure that a target company cannot be put under siege for unlimited periods by a bidder that has not been identified or which is not under any obligation to make an offer. The changes will also impact the strategy of bidders’ approaches and when to make an announcement, particularly where a bidder will require third party financing to effect an acquisition.
Strengthening the Position of the Target Company
PCP 2011/1 provides that deal protection measures, including inducement fees, are generally prohibited because of concerns that such measures deter, and reduce the competiveness of, competing offers. The Panel may consent to inducement fees in the case of auction sales initiated by a target company or in order to incentivise a white knight bidder where the target is the subject of a hostile bid.
The prohibition on deal protection measures is broad and extends to any “offer-related arrangement” with a bidder, thereby including implementation agreements between target and bidder. The prohibition will also prevent bidders from providing finance to, or purchasing assets from, the target during an offer period or when an offer is reasonably in contemplation, except in the ordinary course of business.
The prohibition will not apply to undertakings with respect to confidentiality, non-solicitation and the provision of information to the bidder which is necessary for the bidder to satisfy conditions to the offer or to obtain regulatory approval.
These changes will impact bidders’ strategies, given that they may need to commit resources to a bid without being able to impose any protections on the deal and absent any cost recompense.
Increasing Transparency and Improving the Quality of Disclosure
The Code will also be amended to provide that, whilst offer-related fees are not prohibited, the minimum and maximum amounts payable should be disclosed. The relevant parties will be required to disclose: (i) estimated aggregate fees; (ii) estimated advisers’ fees (broken down by category of adviser, including amounts of any incentive-based fees); and (iii) fees in respect of any financing received.
Providing Greater Recognition of the Interests of Target Company Employees
The Code will be amended to further facilitate the provision of information to employee representatives and employees. Consequently, in addition to statements required under Rule 24.1 (which require a bidder to disclose details of its intentions regarding the future business of the target company and the effect that this will have on employees), it is proposed that a bidder be required to make a negative statement where it has no plans in relation to the points covered by Rule 24.1. Furthermore, Rule 24.1 statements made by the bidder will be expected to hold true for at least one year from the unconditional date.
The proposed changes seek to redress the perceived imbalance in the operation of the Code, which the Code Committee currently sees as favouring bidders, particularly in the context of hostile takeovers. There is, however, also a risk that these revisions will deter bidders unnecessarily.
Without the deal protection measures that bidders have come to rely on, concerns have been raised that bidders will be reluctant to commit money to diligence and financing during an offer period, as such costs may not be recouped if the takeover is unsuccessful. Private equity firms, in particular, will be affected given the high financing costs they incur on bids.
It has been suggested that auction sales could become more common as a result of the changes, as the proposals allow the Takeover Panel to grant an exemption from the revised “put up or shut up” rules, as well as the prohibition on deal protection measures, for auction processes. However, as auction sales may in themselves deter potential bidders given the purchase price uncertainties and the risk of being out-bid, it is not certain whether the advantages under the revised Code would remain sufficiently attractive to bidders.
The consultation period ran until 27 May 2011 and the expectation is that the changes to the Code will be implemented in the autumn of 2011, largely unchanged from the proposals in PCP 2011/1.