On 17 June, the Takeover Panel issued a new Practice Statement on the approach it takes when offer-related debt finance is to be syndicated during an offer period. The Practice Statement describes how the Panel normally interprets and applies certain provisions of the Takeover Code in this context and is intended to assist offerors and their advisers to establish procedures that will enable syndication to occur without breaching the Code.
Over the last few years, the Panel has become increasingly concerned about the activities of debt providers during Panel-governed offer periods, and in particular in the context of the syndication process that often follows the provision of debt facilities to companies (either bidders or targets) subject to the Code.
Of particular concern is the possibility that financial institutions may have the dual role of being a shareholder in the company that is subject to an offer and a potential member of a debt syndicate which is to fund the takeover of such a company. Of particular relevance are Rules 20.1 (which requires that all shareholders receive the same information) and 16 (which applies to special deals with particular shareholders) of the Code.
Provision of non-public information to potential lenders: the debt syndication process
A bidder seeking to raise finance for a cash offer will normally appoint one or more primary lenders to act as the Mandated Lead Arranger (MLA) of the facilities. Before the bidder makes its offer announcement, the MLA will usually commit to provide the debt facility for the offer. Following the offer announcement, the MLA will often approach other lenders to take a share of its financing commitment. As part of this syndication process, the MLA will generally produce and distribute marketing information about the bidder and the target to potential lenders which will often be more detailed than the information that has been provided to shareholders, for example a business plan for the enlarged group. This gives rise to a number of issues under the Code if another part of the potential lender's organisation holds target shares. The Practice Statement considers in particular how Rule 20.1 and Rule 16 should apply in this situation.
Equality of information
If the potential lender's organisation holds target shares, then Rule 20.1 would normally require any non-public information on the bidder or target that is sent to the potential lender to be made equally available to all target shareholders. The Practice Statement describes the circumstances in which information can be sent to potential lenders without having to send it to all target shareholders. In particular, this requires the potential lender to establish effective information barriers between the part of the organisation involved in the debt syndication and the part of the organisation making investment decisions about the target shares. Even if the potential lender does not hold target shares, the MLA should consider requiring the lender to have information barriers or to undertake that it will not acquire target shares other than in certain limited circumstances.
The other concern if a potential lender is also a target shareholder is that offering it favourable debt terms might be used as a way to provide additional value (eg, if the potential lender agrees that it will accept a lower offer in respect of the target shares because it is participating in the debt syndication on attractive terms). The Practice Statement describes steps that can be taken to avoid breaching Rule 16 which either involves putting information barriers in place between the debt and equity teams or involves obtaining clearance from the Panel by providing evidence that the debt that is being syndicated is on "market terms".
The Practice Statement sets out minimum standards for an information barrier to be effective for these purposes which includes physical separation of the potential lender's debt and equity teams and the ring-fencing of information. The potential lender must confirm to the MLA and the bidder's financial adviser that an effective information barrier has been established. If the MLA or the bidder's financial adviser considers that a potential lender lacks experience in dealing with Code transactions it should make further enquiries about the information barriers as a written confirmation alone will not necessarily be sufficient. If the potential lender participates regularly in Code transactions, the Panel will not expect further enquiries to be carried out on every debt syndication in which that potential lender is involved.
Role of financial advisers
The Panel will expect the bidder's financial adviser to take principal responsibility for ensuring that MLAs comply with the Code and that appropriate confirmations and undertakings are obtained. The Panel will, however, also regard the MLAs as being responsible for ensuring that the Code is complied with in relation to the debt syndication process.
Revised LMA documentation
The Practice Statement has been developed with the LMA (Loan Market Association) and LIBA (the London Investment Banking Association). The LMA has produced a revised "Recommended Form of Confidentiality and Front Running Letter for Primary Syndication" and related explanatory material to conform with the new Practice Statement.
Panel Practice Statement (no.25) is available on the Panel website.