Late last year and in the wake of Kraft Food's hostile bid for Cadbury, the Code Committee of the Takeover Panel announced its intention to make some significant changes to the Takeover Code. Despite intense lobbying from the private equity industry, the Code Committee's recent consultation paper (21 March 2011) has not significantly changed the original proposals. The key changes likely to affect the private equity industry are:
- the banning of inducement fee/break fee arrangements, other than in a limited number of circumstances;
- requiring any named bidder to make its position clear within four weeks of its name entering the public domain; and
- requiring disclosure of detailed financial information on bidders.
Other than where a target company:
- is genuinely endeavouring to induce an offer through an auction process;
- wishes to incentivise a "white knight"; or
- is in financial distress
inducement/break fee arrangements will be prohibited.
The Code Committee felt that target boards were being put under considerable pressure to accept such break fee arrangements on the basis that they are 'standard market practice' giving them little or no room for negotiation.
For many private equity investors, inducement/break fees have historically served an important purpose, reducing the risk of their offer being trumped by a subsequent bidder, particularly where they have incurred substantial costs in considering and investigating a target. The prohibition on inducement fees will be a deterrent to public to private deals, particularly for those US private equity houses which have seen inducement fees at 3-4% of deal value in the US.
Naming and four week period
Concern had been expressed in recent years of bidders making 'virtual bids', where a potential bidder announces that it is considering making an offer, but without committing itself to do so. The Code Committee has noted this concern, proposing that any publicly named potential bidder will be required to make their position clear within four weeks of their name entering the public domain (what is known as "put up or shut up").
The Takeover Panel believes this 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.
In the current climate, where deal timetables are longer than they were previously (for many reasons, including availability of funding, extended diligence, trading and valuation discussions), it will be interesting to see whether this four-week period will be sufficient and whether bidders will be requesting the Takeover Panel exercise its discretion by extending this period.
Detailed financial information
All bidders will be required to provide greater details of their financial position and the debt facilities or other instruments entered into (or due to be entered into) by them to finance any offer.
The Code Committee has also now provided clarity on how the increased disclosure of financial information and finance arrangements applies to private equity houses. The Code Committee acknowledges that the structures by which equity is provided to private equity bidder vehicles may be commercially sensitive and does not consider that such equity structures should be required to be disclosed in detail.
For example, the Code Committee considers that a statement that the offeror vehicle's equity was to be provided as to £A million from the private equity house's European Fund I and £B million from its European Fund II would suffice. It would not be necessary, for example, to disclose the leverage within such funds or the split, categorisation or identity of the limited partners, general partners or other underlying participants in the equity financing.
Comments are invited on the latest paper until 27 May 2011, after which the Code Committee plans to publish a Response Statement including the final text of the amendments to the Code. The Code Committee does not consider it necessary to have a long implementation period and will advise on the date for implementation once the response to the consultation has been considered.