In June 2010, the Takeover Panel [the “Panel”] published a consultation document inviting comments on potentially far-reaching changes to the takeover regime. The issue at the centre of the consultation process was whether the rules governing takeovers of UK companies should be made more restrictive, particularly for hostile bidders. Some of the issues raised reflected concerns widely expressed in relation to the lengthy takeover of Cadbury by Kraft earlier in the year.
The Panel's response to the consultation process was published last week and contains a number of measures - some anticipated, others less so - which may have a significant impact on hostile bids in the UK. Also of interest are the measures to change the UK take-over regime considered but rejected by the Panel.
Proposed changes to the Takeover Code
The Panel concludes that, in recent times, hostile offerors have been able to gain a tactical advantage over the offeree company both to its detriment and that of shareholders. As a result, some important revisions to the Code are proposed. The amendments are directed at:
- increasing protection for offeree companies against protracted "virtual bid" periods;
- strengthening the offeree company's position in the context of bids;
- increasing transparency; and
- providing greater recognition for the interests of offeree company employees.
Two proposals stand out. The first relates to the protection against virtual bids. It will become a requirement that if there is a leak about a possible offer and an announcement under Rule 2.4 of the Code (announcement of a possible offer) is made, the identity of the possible offeror must be disclosed. A four week deadline will then be imposed within which the offeror must announce either a firm intention to make an offer, or that an offer will not be made, in which case the normal restrictions relating to further offers by that bidder will apply (although it will be possible to apply to the Panel for an extension to the four week period). This change will require bidders to carry out more preparation for a bid before making an approach, or risk being unable to launch a bid within the four week period which will be imposed if news of the bid leaks out. It will also shorten the period during which it is uncertain whether a company is or is not going to be the subject of a bid. Some commentators have suggested that this change introduces the risk of the offeree deliberately leaking news of possible bids, if they consider that a bid cannot be launched within the timetable. However, the UK Financial Services Authority's recently adopted more rigorous approach to leaks, and reluctance on the offeree's part to become the subject of publicity about bid approaches should avoid this.
The second rule change which stands out, and which was largely unexpected, is the proposed prohibition on deal protection measures – including (i) inducement fees, (ii) "no shop" and "no talk" restrictions, (iii) matching rights, which give a first bidder an opportunity to match a later bid before the latter is recommended, (iv) restrictions on the offeree board changing its recommendations; and (v) restrictions on the provision of information to other bidders. Part of the reason for the introduction of this prohibition is the Panel's view that, taken together, they enabled offerors to impose a package of restrictions (including an inducement fee at the maximum 1 percent. permitted level) on offeree boards, on the basis that they were “market standard” terms. In the Panel's view these types of provisions act as a deterrent to competing offerors and may lead to any competing offers being made on less favourable terms.
The prohibition on deal protection measures will not apply where the offeree has itself instituted a public auction. The Panel also recognised that “implementation agreements”, which are used by offerors in relation to takeovers by scheme of arrangement, could fall within the prohibition. Accordingly it is proposed that offerees should be required to implement schemes in accordance with a timetable agreed in advance with the Panel and published in the scheme circular.
The Panel also proposes:
- amending the Code to clarify that when the target board is considering whether or not to recommend an offer it does not have to treat the offer price as the conclusive factor, and considerations such as the impact of the transaction on the offeree’s business may also be taken into account;
- providing for greater transparency in relation to advisors' fees, with a requirement to disclose these in the offer document;
- information on the offeror's financial condition, which has until now only been required in relation to securities exchange offers, not cash offers. The proposal is that it should now be included in relation to all types of offers;
- a requirement for an offeror to make a negative statement where it has no plans regarding employees, fixed assets or place of business. Where statements of intention are made, offerors will be expected to honour them for at least one year after the offer becomes wholly unconditional. ( This follows the Panel’s criticism of Kraft in connection with its takeover of Cadbury for failing to meet the standards required under the Code in connection with certain statements about Cadbury’s Somerdale facility.);
- and providing that the Code shall not prevent confidential information from being passed to employee representatives during the offer period, and requiring the offeree to inform them as soon as possible of their rights to circulate an opinion on the effects of the offer on employment.
Areas where no changes to the Takeover Code are proposed
As noted above a number of changes, which would have made significant further changes to the UK takeover regime, were considered and rejected by the Panel. The rejected proposals, which would have imposed significant new barriers to consummating a successful bid under the Code, included proposals to:
- raise the acceptance threshold for takeovers above the current level of 50 percent. plus one share;
- the suggestion that shares in the target acquired during the offer period should be disenfranchised as a means of discouraging the "short-term" approach of hedge funds and other speculative investors;
- and a requirement that offeror shareholders approve a takeover offer.