On 21 October 2010, the Code Committee published its response to public consultation 2010/2 which consulted on various market issues following the offer by Kraft for Cadbury. In its response, the Code Committee has been careful to balance the interests and views of government against those of market participants.
After considering the concerns raised, and the responses received, the Code Committee has concluded that initially hostile offerors have, in recent times, been able to obtain a tactical advantage over the offeree company to the detriment of it and its shareholders.
A number of the suggestions put forward in the original consultation would have resulted in significant changes to the Code. Primarily, these changes related to:
- increasing the acceptance condition threshold
- disenfranchising shareholders who come on to the share register during offer periods
- providing protection to offeror shareholders.
Due largely to the close interrelation between these issues and company law or the rules of other regulatory bodies, the Code Committee has decided not to amend the Code in respect of these matters, although it does note that, if company law is amended, it would be logical to bring the Code into line with any such change. (In this connection, see the note on the front page of this issue on the BIS consultation launched on 25 October.)
However, the Code Committee is implementing a raft of other changes that will, nonetheless, attempt to level the playing field in favour of offeree companies and make hostile offers more difficult to implement. The key changes are as follows.
- Reducing protracted "virtual bid" periods by amending the "put up or shut up" regime. This is to be achieved by requiring potential offerors to be named in the announcement which commences an offer period, and imposing a fixed four week deadline on the potential offeror to make an offer for the offeree company.
Comment: this change will have serious implications for the conduct of offers and will mean that potential offerors will have to have advanced bid preparations at the time that they approach an offeree company. It will place far more importance on the need to maintain confidentiality prior to any public announcement of an offer and, potentially, it will make it more difficult for hostile offers to succeed.
- Strengthening the position of the offeree company by prohibiting deal protection measures and inducement fees, except in limited circumstances.
Comment: this change sounds the death knell for implementation agreements. It will be interesting to see how deals progress without the raft of provisions traditionally included in favour of an offeror in such agreements. The absence of an inducement fee may also deter certain offerors (such as private equity funds) from entering a bid process where there is significant uncertainty over the outcome of that process.
- Increasing transparency and improving disclosure by requiring the offeror to disclose more information on its financial position and the financing of an offer, and requiring both the offeror and offeree company to disclose details of their advisers' fees. Even where an offer is for cash, as opposed to shares, the same level of disclosure relating to financial information about the offeror will have to be made. In particular, details of the offeror's funding will have to be disclosed. The Code will also require separate disclosure of each adviser's fees, including the disclosure of upper and lower limits where success fees have been agreed.
Comment: this move towards increased transparency is likely to be particularly welcomed by market participants who have been concerned about the lack of information in these areas.
In addition to the above, the Code will be amended to:
- clarify that offeree company boards are not limited in the factors that they may take into account in giving their opinion and recommendation on an offer
- improve the quality of disclosure by offerors and offeree companies in relation to the offeror's intentions regarding the offeree company and its employees
- improve the ability of employee representatives to make their views known.
Before the changes come into force, the Code Committee will issue further consultations in respect of the changes to be made to the Code as well as setting out a time frame for when the amendments will become effective.
The full text of the Code Committee's response is available on the Panel's website in Panel Statement 2010/22.