UK Takeover Code — Consultation Update
On March 21, 2011, the Committee of the Panel on Takeovers and Mergers published draft proposals for amendments to the United Kingdom City Code on Takeovers and Mergers (Code) to implement its review of the regulation of UK public takeover bids. In our article published in Volume 5, Issue 4 of the Business Law Quarterly, we outlined the review consultation process and preliminary conclusions reached by the Committee during 2010, driven by the public outcry in the UK over the Kraft Foods Inc. takeover of Cadbury plc.
The proposals substantially implement the proposed changes to the Code outlined in the Committee’s preliminary conclusion paper of October 2010, and are as follows:
1. Shorten the "virtual bid period" to increase protection for target companies.
Requirement for a potential offeror to be identified
Where an announcement by the offeree company commences an offer period, the announcement must identify any potential offeror with whom the offeree company is in talks or from whom an approach has been received (and not unequivocally rejected).
Requirement for a potential offeror to "put up or shut up" or obtain a deadline extension
The Committee's preliminary proposals in relation to the 28-day "put up or shut up" deadline, by which the potential offeror must announce that it has a firm intention to make an offer or that it will not make an offer, remain substantially unchanged. Any announcement that first identifies a potential offeror, which gives rise to the 28-day deadline, must specify the date that deadline will expire.
The 28-day deadline will not be applied if another offeror announces a firm intention to make an offer. Any such offeror (whether publicly identified or not) will be required to state whether it will make an offer by a date in the later stages of the offer period to be announced by the Panel.
Extending the 28-day deadline
Under the proposals, the Panel will usually consent (towards the end of the offer period) to an extension of the 28-day deadline, at the request of the board of the target and after taking into account all relevant factors. All deadline extensions and any such relevant matters must be announced.
2. Prohibit deal protection measures and inducement fees other than in certain limited cases.
Dispensations from the general prohibition
The proposed general prohibition on deal protection measures (including implementation agreements, exclusivity agreements, and any agreement by the target not to identify a potential offeror) and inducement fees is substantially as proposed in the October 2010 paper; however, the Committee has included the following dispensations from the prohibition (in addition to the public auction exception previously proposed):
- A competing offeror. Where an offeror has announced a firm intention to make an offer not recommended by the board of the target at the time of that announcement, and remains hostile, the Panel will normally consent to the target entering into an inducement-fee arrangement with a single competing offeror at the time of the announcement of its firm intention to make a competing offer, provided that: (i) the value of the inducement fee is de minimis (normally no more than one per cent of the value of the target calculated by reference to the price of the competing offer at the time of its announcement); and (ii) the fee is payable only if another offer (i.e., not the original hostile offer) becomes or is declared wholly unconditional.
- Financial distress. Where the offeree is in such serious financial distress that its board is actively seeking an offer to be made for it.
Certain matters are excluded from the general prohibition, including agreements as to confidentiality or non-solicitation, directors’ irrevocable undertakings (in their capacity as shareholders, subject always to their duties as directors and under the Code) and any undertakings by the offeror (such as reverse break fees or standstill arrangements).
Subject to the above points, the proposals include certain clarifications in relation to the continued use of implementation agreements in takeovers conducted by way of scheme of arrangement.
3. Increase transparency and improve disclosure.
Disclosure of offer-related fees and expenses
As expected, the proposals envisage that disclosure, on an aggregate and by-category basis, should be required of advisory fees and expenses incurred by the offeror and offeree, now expanded to include "other professional" advisors such as management consultants, actuaries and specialist valuers. Specific disclosure rules are proposed in relation to an offeror’s financing fees and expenses, for example that disclosure should be made on the basis that the offer will complete and that the offer finance will be drawn-down in full. The proposals also deal with appropriate disclosure of commitment fees and variable and uncapped fees. Where fees and expenses materially exceed estimates, a private notification to the Panel must be made; the Panel will require an announcement only where it considers this appropriate.
Disclosure of the same financial information regarding an offeror and the financing of an offer, irrespective of the nature of the offer (e.g., cash only)
The proposed general principle of equal financial disclosures for all types of offers has been retained in the proposals, save that the offer document for a cash offer will not need to contain a "no significant change" statement in relation to the offeror’s position since its last published audited accounts.
However, the Committee now believes that the costs of including a pro forma balance sheet of the combined group in offer documents would outweigh the benefits and that such a requirement would therefore be disproportionate. It has therefore been dropped from the proposals. Furthermore, the proposals do include the obligation to include in offer documents details of ratings publicly accorded to the offeror and the offeree by any rating agency substantially as set out in the October 2010 proposals.
While the Committee considers that an offeror should be required to disclose broad details of the various tranches of debt and equity financing for its current offer, it does not propose that any potential increase in facilities that have been agreed upon (i.e., to finance an increased bid) must be disclosed in the offer document. In addition, the Committee understands the structures by which equity is provided to private equity offeror vehicles may be commercially sensitive and states that it does not consider that such equity structures should be required to be disclosed in detail.
4. Provide greater recognition of the interests of target employees.
Improve the quality of disclosure in relation to the offeror’s intentions regarding the target and its employees
In addition to stating its intentions regarding the target’s business, assets and employees, the proposals also require an offeror to state its intentions with regard to the maintenance of any existing trading facilities for the target’s shares.
Under the proposals the offeror will be held, not only to its statements of intention in the offer document for a period of at least 12 months (or such other period as may be specified in the offer document), but also to all other statements made during the offer period relating to any course of action it intends to take or not to take, whether in a document, an announcement or otherwise. The Committee believes that this requirement should, where appropriate, also apply to statements made by the target board.
Improve the ability of employee representatives to make their views known
In accordance with Committee statements, the proposals amend the Code to improve communications between the target board and target employees with a view to enabling the representatives of the employees to be more effective in providing their opinion on the effects of the offer on employment.
Once the Committee has considered the responses to the proposals, it will publish a response statement that will set out the final text of the Code amendments. The proposals are likely to be implemented without significant change some time in autumn 2011.
The proposals are unlikely to introduce wholesale changes in the way UK public takeovers are conducted or to the appetite for deals in the market, although there will inevitably be some adjustments. The key provisions are those to be introduced to counter "virtual bids" (including naming potential offerors, a fixed 28-day period to announce a bid, and the restrictions on break fees and other deal protection measures), which will mean that transactions will need to be negotiated confidentially and in a relatively shortened timetable to avoid the need to seek a Panel extension. It has been suggested that the outlawing of inducement fees may have the effect of discouraging some bidders, although the Committee’s rationale in doing so was that deal-protection measures have tended to deter competing offers rather than incentivize a potential offeror to make a bid.