The Code Committee of the Takeover Panel has announced its intention to make some significant changes to the Takeover Code.

On 21 October, publishing its response to the consultation it launched in June this year, in the wake of Kraft Food's hostile bid for Cadbury, the Code Committee set out four objectives that it intends to address through amendments to the Takeover Code:

  1. increasing the protection for target companies against protracted 'virtual bid' periods;
  2. strengthening the position of the target company;
  3. increasing transparency and improving the quality of disclosure; and
  4. providing greater recognition of the interests of target company employees.

A number of changes to the Code are proposed, including:

  • Banning inducement fees except where a target company is genuinely endeavouring to induce an offer through an auction process.

The announcement of this intended change may well trigger the start of a change in market practice on bids; requests for such fees, at the maximum permissible level, have become accepted market practice, a point noted by the Committee which felt that this put target boards under considerable pressure to accept such arrangements with little, if any, room for negotiation. Now that the Committee has stated its clear opposition to such arrangements, the days of the current market practice are numbered and, with it, the justification for the target board accepting an inducement fee commitment on the basis that it remains acceptable current market practice.

  • Significantly limiting the scope of what implementation commitments can be sought from a target company. These will be confined to those necessary for:
    • protecting confidentiality;
    • preventing solicitation of customers or employees; and
    • satisfying offer conditions or regulatory requirements.

Implementation agreements are currently customary practice where bids are implemented by way of a scheme of arrangement. Instead, such agreements will be replaced by commitments given direct to the Panel regarding the timing and manner of implementation of such a bid.

  • Requiring disclosure of the estimated fees of each adviser, including and maximum and minimum fee arrangements, and of the fees charged by any providers of finance.
  • Requiring disclosure of detailed financial information on the bidder, whatever the nature of the bid, including information about the bidder's financing for the offer. Where the offer is material there will be a new requirement for the offer documents to contain a pro forma balance sheet on the combined group.
  • Requiring the naming of the potential bidder in any announcement commencing an offer period after an approach has been received, regardless of who makes the announcement.
  • Requiring any publicly named potential bidder to make their position clear within four weeks of their name entering the public domain. The Panel believes this is advantageous as it will give target companies more timing certainty, reduce the period the target company is effectively under "siege" from unsolicited or unwelcome bidders and encourage the avoidance of leaks by a bidder. These rules would not apply where the target company itself initiates an auction process.

The above two provisions will encourage potential bidders to ensure that confidentiality regarding any potential bid is maintained. However, it remains to be seen whether such a move might incentivise a target company to leak news of a possible bid, especially for unwelcome approaches where the bidder might not be ready to bid within such a four-week period. Any such leak by a target company may well have other repercussions, however, and attract the scrutiny of both the Panel and FSA.

  • Requiring that statements in the offer document regarding a bidder's intentions in relation to the target company (in particular the target's employees, location of business and fixed assets) will be expected to hold true for at least one year following the offer becoming or being declared unconditional.
  • Requiring the target board to inform employee representatives of their right to require the board to circulate, at the target company's expense, the employee representative's opinion on the effects of the offer on employment.

The Committee, however, rejected some of the more radical calls for reform proposed in the consultation on the grounds they were unworkable in practice. These had included:

  • Raising the minimum acceptance level above 50% plus one vote.
  • Disenfranchisement or suspension of voting rights in respect of shares acquired in the target during the offer period.
  • Requiring bidder shareholders to approve the making of the takeover offer (other than in the case of reverse takeovers).

The Committee has indicated that it will publish one or more consultation papers in due course setting out the text of the proposed amendments in full.

A copy of the Takeover Panel Code Committee response is now available online.