Background to the UK Takeover Code
The United Kingdom City Code on Takeovers and Mergers (the Code) is a statutory set of rules that shapes the form, structure and timetable of all takeover offers and other merger transactions it regulates. The Code rules are administered by the Panel on Takeovers and Mergers (the Panel), a body of representatives of financial institutions and professional bodies.
The Code applies principally to the following:
- offers for companies which have their registered offices in the UK, Channel Islands or Isle of Man where their securities are admitted to trading on a regulated market in such countries (such as the Main Market of the London Stock Exchange); and
- offers for public (for example AIM-listed) companies that have their registered offices in the UK, Channel Islands or Isle of Man and which are considered by the Panel to have their central place of management and control in such countries.
It follows that a takeover of a UK/Channel Islands/Isle of Man registered company listed on AIM would not be regulated by the Code if management is outside these jurisdictions. Establishing this is a key threshold question when considering a UK takeover.
The application of the Code contrasts to the Canadian regime, where takeover rules apply to any target with a certain proportion of shareholders resident in Canada regardless of where the target is incorporated or listed.
On June 1, 2010, to address the negative public response to Kraft Foods Inc.'s takeover of Cadbury plc, the Code Committee (the Committee) of the Panel published a Consultation Paper (the Paper) setting out the arguments for and against each of the issues raised, together with potential implications of change, providing a forum for debate of the suggestions among City practitioners.
On October 21, 2010, the Committee published its conclusions on the issues raised in its Consultation Paper. Where the Committee has concluded that there is a case for making amendments to the Code, it intends to publish further public consultation papers in due course. These will set out the proposed amendments in full.
The Committee has concluded that:
- The Code should be amended to reduce the tactical advantage that hostile offerors have been able to obtain over a target to its detriment and that of its shareholders and to redress the balance in favour of the target.
- Changes to the Code should be proposed to improve the offer process and to take account of the views of persons affected by takeovers in addition to shareholders of the target.
Proposed amendments to the Code
The Committee proposes amending the Code to:
1. Shorten the "virtual bid" period
It is proposed to increase the protection of target companies against protracted "virtual bid" periods by requiring that any announcement of a "possible offer" name the potential offeror, and further that such offeror must, within four weeks of the date on which it is publicly identified, either announce its firm intention to make an offer under the Code or to announce that it will not make an offer. Currently, there is no fixed period between when such announcement is made and when a formal offer must be announced, nor is there a requirement to name the potential offeror.
The Committee believes that such amendments would provide (i) target companies with more certainty as to the length of the offer process, thereby avoiding long periods where a target is under siege from unsolicited approaches (note that a target company is restricted under the Code from taking defensive or "frustrating" action from the point at which the initial announcement is made); and (ii) an incentive for offerors to avoid its offer being leaked to the market, as there would then be less time for the offeror to formulate offer terms and obtain finance.
These provisions would not apply to an auction initiated by the target.
2. Prohibit deal protection measures and inducement fees
Controversially, it is proposed to prohibit (i) undertakings given to an offeror by a target board to take action to implement a Code transaction, or to refrain from taking action which might facilitate a competing Code transaction (save in limited circumstances, including in relation to the provision of confidential information to the target, or to the non-solicitation of an offeror’s employees, and any necessary undertakings to implement a takeover by way of a Court-approved scheme of arrangement); and (ii) inducement-fee agreements.
The Committee believes it has become standard practice, in recommended offers, for offerors to benefit from a number of deal protection measures, including inducement fees at the maximum possible level (one per cent of target market value at the offer price),which are often presented to target boards as non-negotiable "standard packages." Such packages are seen to have the effect of deterring competing offers or lead to competing offers being made on less favourable terms, rather than incentivising the offeror to make the offer.
Similarly, these provisions would not apply to an auction initiated by the target.
These proposals are in stark contrast to the Canadian position, where break fees of 2 per cent to 3 per cent of a target’s market capitalisation are common, but 4 per cent to 5 per cent have also been agreed, and a full suite of non-solicitation undertakings, matching rights and so on are standard.
3. Provide guidance for directors
It will be clarified that the Code does not limit the factors that the target board may take into account in giving its opinion on the offer and deciding whether to recommend the offer, and particularly that the target board is not bound to consider the offer price as the determining factor. This amendment will be of particular interest to target financial advisors.
4. Require the disclosure of offer-related fees
It is proposed that the estimated aggregate fees should be set out by each party in the offer document, that the estimated fees of the advisors to each of the parties to an offer should be disclosed separately by category of advisor (without revealing commercially sensitive information), that fees in respect of any financing should be disclosed separately and that any material changes to such estimates should be announced promptly.
5. Require the disclosure of the same financial information regarding an offeror and the financing of an offer
It is proposed that detailed financial information on the offeror itself be disclosed in relation to all offers and not only in relation to securities exchange offers, to require, where the offer is material, the inclusion in offer documents of a pro forma balance sheet of the combined group and to require the disclosure in greater detail of the debt facilities of the offeror.
While the focus of the Code is to protect target shareholders, the Committee accepted arguments that persons other than the target shareholders, including target directors, employees, customers, creditors and suppliers of the offeror and the offeree and shareholders in the offeror have an interest in information regarding the financial position of the offeror, even where the offer is for cash.
6. Improve the quality of disclosure in relation to the offeror’s intentions regarding the target
An offeror will be required to detail in the offer document its intentions for the target company following completion of the takeover in much more detail than at present. It is expected that this will involve offerors having to include details on which operations of the business will continue, what will happen to employees and fixed assets and what changes will occur as a consequence of the takeover. Offerors and their advisors will be particularly concerned about the proposed requirements that these stated intentions "will be expected to hold true" for a period of one year from the offer becoming unconditional, unless the Panel otherwise consents. Additionally, an offeror will be required to make a negative statement if there are no plans for change.
These include the following:
- raising the acceptance condition above 50 per cent plus one share;
- disenfranchising shares acquired during the offer period;
- reducing the threshold from one per cent to 0.5 per cent for disclosure of interests in securities;
- reintroduction of the Rules Governing Substantial Acquisitions of Shares, which limited the speed at which persons could increase a holding of shares and rights over shares to an aggregate of between 15 per cent and 30 per cent of the voting rights of a company;
- shortening the 28-day period for the publication of the offer document; and
- requiring advice which is separate from that provided to the target board by the independent financial advisor to be made available to target shareholders.
Implications for other takeover regimes
It will be interesting to note the effect the consultation has on the takeover regimes of other countries that have their roots in the Code, such as Australia, Hong Kong and South Africa, particularly regarding the debate around "bear hug" arrangements and the introduction or refinement of "put up or shut up" provisions dealing with protracted virtual bids.