The Code Committee of the Takeover Panel, the UK body which supervises the conduct of public takeovers, (the Panel) published on 21 March 2011 a Public Consultation Paper 2011/1 with specific proposals to overhaul of the UK public takeover regulations contained in the City Code on Takeovers and Mergers (the Code). The Code is relevant to any potential bidder for a public company in the UK (even if such company is unlisted) and certain private companies.
The proposed changes are the most significant in the last five years and will require potential bidders and targets to re-assess what had become market standard strategies. The previous significant change in the Code, the abolition of the rules governing the substantial acquisition of shares in May 2006, favoured hostile bidders as bidders are permitted to build up positions by stealth in “morning raids”, such as the acquisition of BAA, in which Ferrovial built a stake of more than 28% de-railing Goldman Sachs’s competing offer.
By contrast, the new proposed changes will be a disincentive to early exploratory meetings with a potential target and are likely to favour trade buyers focused on business synergies rather than private equity bidders where assessment of the financial rationale of the deal is the main consideration. The proposed changes have already caused a commotion in the private equity industry and are likely to prompt significant debate.
The changes announced by the Panel seek to address a number of trends which have developed in recent years, particularly an environment which favours:
- hostile or quasi-hostile offers, requiring directors to tread a fine line regarding their statutory duties within a framework in which cash is king above other considerations when deciding whether to recommend an offer;
- first bidders, who have a tactical advantage over potential competing bidders if, for example, they are able to secure break fee agreements with the target and undertakings with key shareholders; and
- “virtual bids” in which a possible bidder indicates an interest but an offer is not forthcoming requiring a drawnout process.
The consultation regarding the proposed changes will close on 27 May 2011. [If you wish to send any comments to the Panel’s Code Committee in respect of these proposed changes, you can do so at the address set out at the end of this note.]
The main changes proposed by the Panel are as follows:
Increased target protection
- requiring potential bidders in a “virtual bid” situation to be named and to clarify whether they will make a bid within a specific time frame;
- banning bidder’s deal protection measures and inducement fees other than in some limited cases;
- clarifying that the directors of target are not limited in the factors that they may take into account in deciding whether to recommend an offer and giving their opinion;
Additional disclosure requirements
- requiring additional disclosures, including offer-related fees, whether the offer is an all-cash or share exchange offer;
Increased target employee and current business protection
- improving disclosure of the bidder’s intentions regarding the target and its employees;
- binding the bidder to its statements of intention for a year after a successful bid; and
- improving the ability of employee representatives to give their opinion.
PROTECTION AGAINST EXTENDED “VIRTUAL BIDS”
The Panel has considered that companies can be “put into play” all too easily and may be subject to extended periods of uncertainty before a potential bidder is required to clarify its intentions.
One of the main principles which inspired the Code is that companies should not be subject to prolonged ‘siege’ by bidders, as this distracts the company and its management from its business and may distort the market. To achieve this, the Code sets out a strict time framework for public offers. However, potential bidders can unduly extend this period by delaying the announcement of a firm intention which triggers the Code timetable.
Certain proposals that were initially considered by the Panel such as disenfranchising shares purchased during an offer period and increasing the acceptance condition threshold beyond 50% plus one have not been included in the proposal given the virtually unanimous opposition to those in the initial consultation carried out by the Panel.
A potential target may apply to the Panel to require the potential bidder to “put up or shut up”. However, potential targets are seldom keen on making such an application as this would antagonise the potential bidder early in the process.
Therefore, the Panel proposes to introduce the following changes:
- Naming of bidder - following an approach to target, the potential bidder must be named in any announcement commencing an offer period (regardless of whether the announcement is made by the potential bidder or the target).
- Automatic “put up or shut up” - within four weeks of being so named, the potential bidder must either (a) announce a firm intention to make an offer, (b) confirm that it will not make an offer (in which case, other than in limited circumstances, it will be prohibited from making an offer within six months) or (c) make a joint application with target for an extension.
PROHIBITION ON OFFER-RELATED ARRANGEMENTS
It is now standard market practice in non-hostile approaches to agree on protection measures for the potential bidder. These could include for example:
- undertakings by the board of directors including commitments to implement a bid or not to take any action that may facilitate a competing bid; and
- break fees, which are generally agreed at the legal maximum (1% of the deal value).
The Panel is of the view that these arrangements hinder the ability of competing bidders to “throw their hat in the ring” and proposes to introduce changes so that:
Prohibition of offer-related arrangements - a target would be prohibited from entering into any offer-related arrangement with the bidder (or ‘parties in concert’) without consent from the Panel (for example, where the arrangement would have been entered into even in the absence of an offer). This would exclude ‘procedural protections’ such as non-solicitation covenants, confidentiality and others.
Dispensations and exclusions - the above prohibition could be relaxed in certain cases such as where the target is subject to a hostile bid and is seeking a ‘white knight’.
The Panel proposes several amendments to the requirements for disclosure in the offer documentation. The most novel of the changes proposed is that the bidder and target should include an estimate of the following fees to be incurred in respect of the offer: (a) advisers, such as accountants, lawyers and PR; and (b) financing fees, including any success fees or other incentives in the offer document or target circular.
The Panel was reportedly spurred overhaul the Code by the conduct of Kraft’s successful hostile bid for Cadbury. Kraft, who as a hostile bidder was unable to conduct extensive diligence, had made repeated statements in offer documentation that it would keep open Cadbury’s Somerdale plant. However, shortly after Kraft’s offer became unconditional and it gained further access to Cadbury’s information, Kraft decided that the plant would be closed. This departure from the stated intention had extensive media coverage and led the Panel to issue a public criticism of Kraft under the Code.
The changes were therefore bound to include provisions requiring the parties to give due consideration to employees and the business in the context of a takeover, particularly a hostile bid. Although the Code already requires a bidder to include statements regarding its plans for the business, in the case of cash offers, the statements regarding the business tend to be standardised and generic so they provide little visibility of the intentions of the bidder.
Negative statements - the proposed changes will now require a bidder to make negative statements if it has no intention to make changes regarding the continued employment of employees or regarding their terms of employment.
“Hold-true Period” - the Panel proposes to introduce a requirement that, unless it consents otherwise, a statement regarding the bidder’s intended course of action must generally hold true for 12 months following the offer becoming (or being declared) wholly unconditional.
Communication with Employees - new measures are also proposed to bolster communication with employees and the position of the employee representatives who are to be the point of contact.
THE ROAD AHEAD
As noted above, the consultation regarding the proposed changes will remain open until 27 May 2011 and the Panel will accept and publish comments from interested stakeholders. Any such comments can be sent by email, fax or post to:
The Secretary to the Code Committee- The Takeover Panel
10 Paternoster Square, London EC4M 7DY, UK
Email: email@example.com/ Fax No: 020 7236 7005
Please note that any comments sent to the Panel will be publicly published in full, including any contact details provided therein, unless expressly requested otherwise.
The full 170-page consultation document can be accessed at the Panel’s website: http://www.thetakeoverpanel.org.uk/consultation/current-consultations.