In broad terms the remit of the Takeover Panel is to provide a framework for the regulation of takeovers in the UK, as set out in the City Code on Takeovers and Mergers (the Code).
Following the very public takeover bid by Kraft Food Inc. for Cadbury plc the Takeover Panel issued a public criticism of Kraft for certain statements made by Kraft about the future of Cadbury’s Somerdale factory in the context of its offer for Cadbury. These statements did not meet the required standards of accuracy for information published during the course of the takeover offer, as prescribed under Rule 19.1 of the Code, and this prompted observers to suggest that bidders should provide more information about the financing of takeover bids, their implications and effects, and that boards of target companies should set out their views on a bidder’s intentions for the target post-takeover in more detail.
These events served as a catalyst which prompted the Takeover Panel to issue a consultation paper which focused on a number of potential areas of UK takeover regulation, and in particular, possible reform of that area.
Another aspect of the Kraft takeover that received significant attention was the influential role which short-term investors were seen to have played in securing the acceptance condition of 50% plus one. Two related issues which merit consideration in this context are (i) the threshold of the current acceptance condition (i.e. 50% plus one); and (ii) the fact that strategic (or short-term) investors can buy shares following the announcement of a possible offer and then, by accepting the offer with their voting shares, can influence the outcome of the offer.
In order to address these issues it has been suggested that:
- the acceptance condition should be raised, for example from the current 50% plus one level to 60%, in order to set a more difficult hurdle, particularly where there is a hostile takeover bid. A 60% hurdle is somewhat arbitrary but it should be borne in mind that any proposed increase in this percentage threshold is largely politically driven, with certain commentators (including politicians and trade unions alike) wanting to see greater protection from foreign takeovers for UK companies; and
- there should be an effective disenfranchisement of shares bought during an offer period, so that only those persons holding shares at the beginning of the offer period may vote during that period and thereby count towards the above-mentioned acceptance condition threshold.
However, certain commentators have expressed concern over this proposed disenfranchisement approach to curbing investor short-termism in this context on the basis that such so-called short-term shareholders have of course bought their shares from long-term shareholders and disenfranchisement would effectively remove their ability to exercise one vote for one share and it goes against the fundamental principle of the free flow of capital. Indeed, others have since noted that it is likely that this disenfranchisement would in any case be in breach of the Takeover Directive.
We also note that the Takeover Panel’s consultation paper has raised the following additional issues for consultation:
- Whether there should be: more disclosures of interests by parties to an offer by lowering the current 1% threshold; disclosure of offer/acceptance and voting decisions; and clarification of the rules on the splitting of dealing, voting and offer acceptance conditions between two or more persons (for example, a beneficial shareholder and its fund manager).
- Whether shareholders of the bidder should be protected.
- Whether the so-called "put up or shut up" regime (which imposes an offer deadline on the bidder) needs to be reviewed; and whether the 28-day period between the announcement of a firm intention to make an offer and the publication of an offer document should be reduced.
- Should shareholders in the target company be given independent advice on an offer, should success fees should be restricted, and should details of advisory fees be publicised?
- Whether inducement fee arrangements and other deal protection measures should be restricted.
- Whether any safeguards similar to the Rules Governing Substantial Acquisitions of Shares, which were abolished in 2006, should be reinstated.
It should be noted that in issuing its consultation paper the Takeover Panel is not actively promoting the introduction of any of the above changes. However, it is trying to understand the market’s reactions to the issues it has raised in its consultation paper and to facilitate appropriate debate by putting forward in that document various arguments and counter-arguments for such changes to the current system of takeover regulation in the UK.
At this relatively early stage of the consultation process it is difficult to gauge whether all, some or none of the proposed changes to takeover regulation in the Takeover Panel’s consultation paper are likely to progress to being reflected as changes to the Code and/or as statutory amendments, not least because some of the more political proposals were made before the change in the UK government in May this year. The Conservatives and Liberal Democrats had certain differences of approach to takeover regulation before the May election and the formation of the coalition government. However, the business secretary under the coalition government has subsequently indicated that he is supportive of a tighter takeover regime. In addition, since the suggested changes derive from a number of different sources and since some of them are outside the scope of the Takeover Panel’s remit, it would not in any event be possible to implement them together in one tranche.
However, it is likely that any changes to the takeover regime that would mean a potential conflict with UK company law are less likely to be implemented – e.g. raising the acceptance condition above 50% plus one.
Other commentators have advised caution regarding these possible changes to the takeover regime, stating that they believe the Code operates perfectly well in its current form in governing the vast majority of transactions each year. Furthermore, they are quick to point out that it is not wise to implement these fundamental changes to the takeover regime in light of the experience and lessons learnt from this one transaction alone.
One of the more immediate consequences of the Kraft/Cadbury experience and the Takeover Panel’s public criticism of Kraft is that advisers to a bidder are now more likely to focus their efforts on ensuring that the verification process is more robust and stands up to increased scrutiny.
The Takeover Panel’s consultation on these changes to the takeover regime closed on 27 July. The government has since announced that it will publish a further paper on the regulation of takeovers once it has had an opportunity to consider the suggestions for reform put forward in response to that paper.