On 21 October 2010, the Code Committee of the Takeover Panel issued the response statement to its Public Consultation Paper (PCP 2010/2), ‘Review of Certain Aspects of the Regulation of Takeover bids’, which was published on 1 June 2010. The consultation was the culmination of a process started by the Code Committee of the Takeover Panel at the beginning of 2010 in response to public and press comments on issues relating to the operation of the Takeover Code in the Kraft Foods Inc takeover bid for Cadbury plc. At the time, suggestions for changes to the Takeover Code were also made in speeches by the then Secretary of State for Business, Innovation and Skills, Lord Mandelson, on 1 March 2010, and by the then Financial Services Secretary, Lord Myners, on 8 March.
The consultation gave rise to an unprecedented number of responses, with 97 formal responses being received from a broad range of respondents representing industry, investors, academics, practitioners, trades unions and individuals. It also occasioned a great deal of discussion among market participants and other interested constituencies.
The response statement sets out the Code Committee’s conclusions on the main issues covered in PCP 2010/2. Where the Code Committee has concluded that there is a case for making amendments to the Takeover Code rules, it said that it intends to publish one or more public consultation papers in due course that will set out the proposed amendments in full. This is because, unlike its normal practice of using the consultation document to describe proposed amendments to the Takeover Code and setting out drafting changes, in PCP 2010/2, the Code Committee only set out the arguments for and against each issue raised, as well as potential implications of change. The further public consultation papers are expected by the end of 2010.
It was a theme of the responses that it has become too easy for hostile bids to succeed and that a cause of this was the actions of short-term investors who will often enter the picture to exploit price differentials through merger arbitrage.
The Code Committee concluded that hostile bidders have recently been able to obtain a tactical advantage over the target company to the detriment of the target and its shareholders. The Code Committee has therefore decided to make proposals to amend the Takeover Code with the aim of reducing such tactical advantage and to redress the balance in favour of the target company. Several respondents made specific suggestions about how the Takeover Code could be amended to deal with this issue. The Code Committee has given its views on each of the principal suggestions, and has also made some further proposals itself, with the following objectives:
- increasing target companies’ protection against protracted ‘virtual bid’ periods between the start of an offer and the firm offer announcement;
- strengthening the target company’s position;
- increasing transparency and improving the quality of disclosure; and
- providing greater recognition of target’s employees’ interests.
The Code Committee’s views and proposed amendments are summarised below.
Raising the acceptance threshold
The Code Committee confirmed that respondents were almost unanimously opposed to raising the minimum condition threshold of 50% plus one for both voluntary offers (Rule 10) and mandatory offers (Rule 9) on the basis that the Takeover Code acceptance threshold is linked with the threshold for passing an ordinary resolution under company law (which itself would enable changes to a company’s board to be made). Any raising of the acceptance threshold under the Takeover Code would therefore also require a corresponding increase in the threshold for the passing of an ordinary resolution, otherwise several issues would arise. For example, if a bidder had obtained acceptances of more than 50%, but not more than the increased acceptance condition threshold, the position of the board of the target company ‘would, in practice, be unsustainable’. Without a corresponding change in the threshold for passing an ordinary resolution, the Code Committee concluded that the Takeover Code acceptance condition threshold should not be amended.
Again, respondents were almost unanimously opposed to disenfranchising shares acquired during the offer period, as well as to introducing a qualifying period before shares would have voting rights. Respondents said that these types of proposals would go against the ‘one share, one vote’ principle and would also be against the principle of ‘equivalent treatment’ for all shareholders under General Principle 1 of the Takeover Code. Without corresponding changes being made to company law, the Code Committee does not consider that the Takeover Code should be amended to disenfranchise shares acquired during the offer period, or to introduce qualifying periods or weighted voting rights.
protection for offeror shareholders
The majority of respondents were opposed to the introduction of similar protections for shareholders of a bidder to those provided in the Takeover Code for target company shareholders. Arguments made by respondents included the following:
- Additional protections were unnecessary as bidder shareholders were already protected by company law, the duties of bidder directors and other rules and regulations, for example those of the UK Listing Authority.
- This could operate unfairly between competing bidders, in particular if a competing bidder did not have any shareholders.
- If a vote by bidder company shareholders was introduced, this could give the bidder an opportunity to lapse an offer without being required to fulfil the materiality test under Rule 13.4(a) to invoke a condition to the offer.
The protection of bidder shareholders would involve an extension of the Takeover Panel’s current role and the Code Committee has decided that it does not intend to propose any amendments to the Takeover Code to provide such protection. However, it does propose to amend the Takeover Code to require additional disclosures in offer documentation as to:
- The financial position of the bidder and its group, and the financing of the bidder’s offer.
- The bidder’s future intentions as regards the target company and its employees.
Amendments to the ‘put up or shut up’ regime
To provide target companies with greater protection against protracted virtual bids, the Code Committee proposes to amend the Takeover Code to require that:
- Following an approach, the potential bidder is named in the announcement that commences an offer period, irrespective of which party publishes the announcement.
- Any publicly named potential bidder must (except with the panel’s consent), within four weeks of the date on which the potential bidder is publicly named:
- make a firm offer announcement under Rule 2.5;
- announce that it will not make an offer, following which it will be subject to the restrictions in Rule 2.8; or
- apply jointly with the target company to extend the deadline and give an explanation of the expected timetable to making the firm offer announcement.
One of the advantages of these amendments would be that a bidder would have a ‘strong incentive to avoid its potential interest in making an offer being leaked to the market’. A leak would mean a shorter period of time for a bidder to formulate its offer.
The Code Committee also confirmed that it does not intend to:
- Extend the amendments to the ‘put up or shut up’ regime to cover situations where the target board has started a formal process to sell the company by way of a public auction.
- Amend the code to provide for private ‘put up or shut up’ deadlines (whereby neither the fact of the approach nor the setting of the deadline would be made public). The Code Committee said that it did not consider that, in a private context, a target company would normally be subject to an unacceptable level of ‘siege’. However, in exceptional cases, where the target company made a convincing case that this was so, the Takeover Panel could consider setting a private ‘put up or shut up’ deadline by virtue of General Principle 6 of the Takeover Code.
inducement fees and undertakings
The Code Committee proposes amending the Takeover Code to introduce a general prohibition (other than in certain limited cases) on:
- undertakings given to a bidder by a target board to take any action to implement a transaction to which the code applies, or to refrain from taking any action that might facilitate a competing transaction; and
- inducement fee agreements.
The Code Committee agreed with concerns expressed by respondents that these now standard packages of deal protection measures have a detrimental effect for target company shareholders as they may deter competing offerors from bidding, or lead to them making a bid on less favourable terms.
The Code Committee acknowledges that a bidder could legitimately request certain undertakings from the target board, for example as to the confidentiality of information it provides to the target in the course of the offer and an undertaking not to solicit the bidder’s customers or employees. However, there is a concern that allowing any additional undertakings to be sought from the target board would lead ‘through incremental extension’ to a return to the current market practices.
To ensure that the introduction of a prohibition on deal protection measures does not cause an issue where the offer is proposed by means of a scheme of arrangement, the Code Committee intends to amend the Takeover Code to provide that, where the target board agrees to the inclusion of its recommendation in the bidder’s announcement of a firm offer by way of a scheme, the target board will be required to implement the scheme in accordance with a timetable to be agreed in advance with the Takeover Panel and published in the scheme circular (subject to the withdrawal of the recommendation).
The Code Committee also confirmed that it does not propose to extend the prohibition on deal protection measures and inducement fees to cover situations where the target board has started a formal process to sell the company by way of a public auction.
Considerations of target companies
The Code Committee proposes amendments to the Takeover Code to clarify that it does not limit the factors that the target board may take into account in giving its opinion on the offer, and deciding whether or not to recommend the offer, and that the target board is not bound to consider the offer price as the determining factor.
disclosure of offer-related fees
The Code Committee has concluded that:
- success fees should not be prohibited (other than to the extent currently provided in the Takeover Code);
- the minimum and maximum amounts payable as a result of any success, incentive or ratchet mechanism should be disclosed (but not in a way that discloses commercially sensitive information about the offer);
- the estimated aggregate fees should be disclosed by each party in the offer document or initial target board circular (as the case may be);
- the estimated fees of each party to the offer’s advisers (including financial advisers, corporate brokers, accountants, lawyers and PR advisers) should be disclosed separately by category of adviser;
- fees in relation to the financing provided to a party should be disclosed separately from advisory fees; and
- material changes to the estimated fees disclosed should be announced promptly.
Disclosure of financial information
The Takeover Panel has normally taken the view that financial information on a bidder and the financing of the offer is only likely to be relevant in a securities exchange offer, where the target company shareholders would become shareholders in the bidder. However, the Code Committee has concluded that persons in addition to target company shareholders may be interested in the financial position of the bidder, including the target company directors and employees, customers, creditors, and suppliers of both the target and the bidder, as well as bidder shareholders.
The Code Committee proposes the following amendments to the Takeover Code:
- detailed financial information on a bidder must be disclosed in all offers and not only on securities exchange offers (this would include the deletion of Rule 24.2(b) and Note 6 on Rule 24.2);
- the introduction of new provisions in Rule 24.2 to require, where the offer is material, that a pro forma balance sheet of the combined group is included in offer documents, as well as details of the ratings given to the bidder by rating agencies (plus any changes that arise due to the offer);
- greater disclosure of the debt facilities or other instruments entered into by a bidder to finance the offer, regardless of whether the payment of interest, repayment or security is dependent to any significant degree on the target’s business; and
- a requirement that all documents regarding the financing arrangements be put on display under Rule 26.
Improving disclosure of bidder’s intentions
The Code Committee has concluded that:
- bidders should continue to disclose details of any plans regarding the target company’s employees, locations of business and fixed assets (as required by Rule 24.1);
- the Takeover Code should be amended to include a new requirement for bidders to make negative statements if there are no such plans; and
- the Takeover Code should be amended to make it clear that (except with the panel’s consent), statements made in offer documents about a bidder’s intentions for the target company, its employees, locations of business and fixed assets (or the absence of any such plans) should remain true for at least one year after the offer becomes, or has been declared, wholly unconditional (unless another period is stated).
The Code Committee proposes to amend the Takeover Code to:
- clarify that the code does not prevent the provision of information in confidence to employee representatives acting in such a capacity during the offer period;
- require the target company board to inform employee representatives at the earliest opportunity of their right to circulate an opinion on the effects of the offer on employment;
- clarify that it is the responsibility of the target company board to publish the opinion of the employee representatives at the target company’s expense; and
- require the target company to pay the employee representatives’ costs incurred in obtaining advice that may be needed for the verification of the information in the employee representatives’ opinion.
Other rejected proposals
The Code Committee has confirmed that it does not intend to implement several suggestions for amendments to the Takeover Code contained in PCP 2010/2 at the present time. These include the following:
- Reducing the disclosure threshold from 1% to 0.5% for Rule 8.3 disclosures.
- The reintroduction of the Rules Governing the Substantial Acquisitions of Shares (SARs).
- Shortening the 28-day period for the publication of the offer document. The Code Committee concluded that, as it is likely that offer periods will become shorter due to the proposed changes to the ‘put up or shut up’ regime, and that it is not typically in a bidder’s interests to delay the publication of its offer document, the maximum time period should not be reduced from 28 days.
- Requiring separate advice to be made available to target company shareholders to the advice provided to the target board by the Rule 3 adviser.
- The splitting up of dealing, voting and offer acceptance decisions. The Code Committee concluded that further consideration needs to be given as to whether appropriate provisions could be included in the Takeover Code to improve transparency, where the dealing, voting and offer acceptance decisions in relation to a discloseable shareholding have been split between two or more persons.
- Disclosure of offer acceptance and scheme voting decisions.
By Duncan Scott, solicitor,
Speechly Bircham LLP.