On 21 October 2010, the Takeover Panel published its response to the most recent public consultation on possible amendments to the Takeover Code (see our June 2010 E-Bulletin article: Takeover Panel initiates review of Takeover Code).
The response concludes that there is a case for proposing certain amendments to the Code to reduce the tactical advantage that offerors have over offeree companies as a result of the increased use in recent times of so-called "virtual bids" and of deal protection measures (including inducement fees).
What is a "virtual bid"?
A "virtual bid" arises whenever an offeree company enters an offer period without a formal offer having been announced – for example, following the announcement of an approach or of a possible offer. "Virtual bids" have a number of disdvantages for offeree companies. They can be drawn-out and destabilising processes and often lead to significant changes in the composition of shareholder registers (with merger arbitrageurs acquiring interests in shares). In addition, during a "virtual bid", an offeree company is restricted generally by the Code from taking any action that might frustrate a possible offer.
Conversely, "virtual bids" have a number of advantages for potential offerors. A "virtual offer" is a low-cost way of securing the protections afforded by the Code against an offeree company taking action which might frustrate a possible offer. In addition, after the commencement of an offer period, a potential offeror is able, in effect, to bypass the offeree company board and engage directly with offeree company shareholders generally regarding the terms of a possible offer (without having to commit to make a formal offer).
What are deal protection measures?
Deal protection measures are undertakings sought by offerors from offeree company boards which are designed to deter competing offerors (for example, by requiring the payment of an inducement or break fee by the offeree company in the event of a competing recommended offer) and to restrict the ability of the offeree company board to engage with potential competing offerors (so-called "no shop" restrictions).
Proposed amendments to the Code
In order to seek to redress the tactical advantage that offerors have over offeree companies (and to generally increase transparency during offers), the Panel's response concludes that the following amendments to the Code should be proposed.
Strengthening of the existing public "put up or shut up" regime to address "virtual bids" concerns
One way in which a "virtual bid" can be brought to an end is by the imposition by the Panel of a so-called "put up or shut up" deadline on a potential offeror whose identity has been publicly announced. In this connection, the Panel's response notes that offeree company boards are often reluctant to request that the Panel impose such a "put up or shut up" deadline because such a request might be regarded as self-serving or defensive. Accordingly, the Panel proposes to strengthen the existing public "put up or shut up" regime by introducing the following amendments to the Code:
- a requirement that, following an approach, a potential offeror be named in the announcement which commences the offer period, regardless of which party issues that announcement; and
- a requirement that, except with the consent of the Panel, any potential offeror must, within the period of four weeks following the public announcement of its identity: (i) announce its intention to make a firm offer; or (ii) announce that it will not make a firm offer; or (iii) make a joint application with the offeree company to the Panel to extend the period by which it must have clarified its intentions.
Recognising that the concerns noted above regarding "virtual bids" are less relevant where an offeree company board has initiated a formal sale process by means of a public auction, the Panel does not propose to extend the above amendments to auction processes.
The Panel also considered and rejected the introduction of a general private "put up or shut up" regime, which would apply following an approach but before the commencement of an offer period. The response did however note that, in certain exceptional cases, private "put up or shut up" deadlines might be imposed by the Panel in future.
General prohibition on deal protection measures and inducement fees
The Panel's response concludes that, in many cases, deal protection measures are detrimental to the interests of shareholders in offeree companies. Accordingly, the Panel proposes to include a general prohibition in the Code on so-called deal protection measures (including inducement fees). This general prohibition would not however apply where an offeree company board has initiated a formal process to sell the company by means of a public auction.
Measures to increase transparency and to improve the quality of disclosure
The Panel also proposes the following amendments to the Code to increase transparency and to improve the quality of disclosures made during the offer process:
- a requirement that the estimated aggregate transaction fees payable by both the offeror and offeree be disclosed in the offer documentation (and that the fees of the individual advisers be disclosed separately by category of adviser);
- a requirement that detailed financial information on an offeror must be disclosed in all offers (and not just in securities exchange offers, as is currently the position);
- a requirement that more information be disclosed in respect of the financing arrangements entered into by an offeror in respect of an offer; and
- a requirement that, except with the consent of the Panel, any statements made by an offeror regarding its intentions in relation to the offeree company (and, in particular, its employees, locations of business and fixed assets) will be expected to hold true for a period of at least one year following the offer becoming or being declared wholly unconditional.
The Panel intends to publish public consultation papers in due course, which will set out the proposed amendments to the text of the Code in full.
View the Panel response (28 page pdf).