The UK Takeover Panel recently amended its requirements for profit forecasts and quantified financial benefits statements in the context of transactions governed by the Takeover Code, in some cases relaxing the rules where the forecast is less contentious, but in other respects broadening them. The changes to, among others, Rule 28 of the code took effect on September 30 2013 and were announced in Response Statement 2012/1.
A statement can amount to a profit forecast if it expresses or implies a figure (or a minimum or maximum figure) for the likely level of profits or losses of a company, or if it simply contains data from which a calculation of such a figure can be made.
With the recent changes to Rule 28, the code has been revised to align with the Financial Conduct Authority Prospectus Rules and states that a profit "target" or "budget" will normally be treated as a profit forecast, unless it is clear that it is only aspirational (Note 1 to Rule 28.1).
The profit forecast regime catches statements relating to the current financial period and/or future financial periods, and potentially those relating to a financial period that has expired, if audited results have not been published.
The basic requirements for profit forecasts remain unchanged in the revised Rule 28. Under Rule 28.1(a), if a target or a bidder offering securities as consideration makes a profit forecast during an offer period, or in an announcement that triggers an offer period, it must comply with the strict content and quality requirements of the code and must obtain two third-party reports:
- a report from its reporting accountant stating that, in its opinion, the forecast has been properly compiled and is consistent with the company's accounting policies; and
- a report from its financial adviser stating that, in its opinion, the forecast has been prepared with due care and consideration.
Similarly, if a profit forecast is published before an offer period commences, but after an approach has been made regarding a possible offer, the forecast must be repeated and reported on as set out above (Rule 28.1(b)).
The amended rules introduce a lighter reporting regime for profit forecasts that are already "on record" before an approach has been made (Rule 28.1(c)). In these circumstances, the company can choose from three options:
- Publish a revised forecast (which will need to comply with the full reporting regime described above);
- Tell shareholders to disregard the profit forecast entirely; or
- Repeat the forecast with certain confirmations made by the directors themselves.
If the company chooses the third of these options, the directors' confirmations will be similar to those normally required from an accountant – namely, that the forecast remains valid, has been properly compiled and is consistent with the company's accounting policies.
Companies that can demonstrate that they have an established practice of updating the market with statements regarding future financial performance may also be able to take advantage of this new directors' confirmations regime – although if these statements are made during the offer period, this will require the consent of both parties to the offer (Note 2 to Rule 28.1).
The final area where a company may be able to give directors' confirmations rather than commission third-party reports is where the profit forecast is for a future financial period, which the panel defines as relating to a period that ends more than 15 months after the date on which the forecast is published (Rule 28.2). Given the potential difficulties in obtaining third-party reports on this data, directors' confirmations will be acceptable. However, forecasts for the intervening period will also be required and these may require full third-party reports, depending on when they were first published.
Dispensations from the full reporting regime are unlikely to be given in respect of management buy-outs or offers by controlling shareholders, even where they are for existing "on record" or ordinary course profit forecasts, because the panel considers that the management team or controlling shareholder might have an incentive to depress a profit forecast in order to acquire the company more cheaply (Note 3 to Rule 28.1).
The following amendments have been made to the rules governing profit forecasts:
- Quantified financial benefits statements (formerly known as 'merger benefits statements') – the revised definition expands the operation of these rules to include statements made during recommended offers and also statements made by a target company attempting to quantify financial benefits that may accrue if an offer is rejected. If these statements are made, strict content and quality requirements will apply and the company must obtain third-party reports from an accountant and a financial adviser, as described above.
- Clarification on when dispensations from the rules may be granted – a dispensation may be available where the effect of the application of Rule 28 would be disproportionate or otherwise inappropriate. For example, dispensation may be appropriate where the forecast sets out a profit ceiling rather than a floor, since – in the context of an offer – it is not normally in the interests of the party making the forecast to set a ceiling. Dispensation may also be appropriate for an offeror's profit forecast where the consideration securities will not represent a material proportion of its enlarged share capital or the value of the offer (Note 4 to Rule 28.1).
- Forecasts for part of a business – the new rules make it clear that they apply in respect of a part of a business in the same way as to a forecast for the whole, although the panel may grant a dispensation in cases of genuine non-materiality (Note 5 to Rule 28.1).
- Profit estimates – exemptions from the requirements remain available for preliminary statements of annual results, half-yearly reports or interim financial information, provided that they comply with certain specified regulatory and/or accounting standards, on the basis that the numbers should be sufficiently reliable (Rule 28.5).
- Investment analyst forecasts – the code contains a number of rules dealing with forecasts prepared by third parties. Parties to a bid are permitted to refer to "consensus" (average) forecasts on their websites, provided that these are calculated in accordance with the code and the website includes a prominent disclaimer stating that the profit forecasts are not endorsed by the company concerned (Rule 28.7). Additional rules apply if the parties refer to these forecasts in their offer documents or announcements (Note 6 to Rule 28.1 and Rule 28.8).
The panel recently published a slide presentation summarising the changes to the profit forecast regime and how Rule 28 is intended to apply in practice.
The changes to the regime will reduce the burden on parties to an offer where forecasts are less contentious. They are also helpful in that the regime is now more closely aligned with the EU Prospectus Directive regime as implemented in the United Kingdom through the Financial Conduct Authority Prospectus Rules and related European Securities and Markets Authority recommendations on the consistent implementation of the EU Prospectus Regulation.
For further information on this topic please contact Will Pearce or Victoria Kershaw at Davis Polk & Wardwell London LLP by telephone (+44 20 7418 1300) or email (firstname.lastname@example.org or email@example.com). The Davis Polk & Wardwell website can be accessed at www.dpw.com.
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