Changes to the Takeover Code and how they are likely to affect UK deals
New edition of the Takeover Code
A revised edition of the UK Takeover Code came into effect on 19 September 2011 bringing into force proposals made by the Takeover Panel following its review of UK takeover rules in the wake of Kraft Food Inc's hostile takeover of Cadbury plc in 2010. This article highlights the main changes to the Takeover Code and looks briefly at how they might affect the way potential bidders prepare for UK deals.
Disclosure of potential bidders
Under the revised rules, an announcement by a target which begins an offer period under the Takeover Code (whether voluntary or in response to market rumours) must now name any potential bidder that the target is in talks with or from whom it has received an approach (unless the approach has been rejected by the target). Where the target is in discussions with more than one potential bidder, each bidder must be identified in the announcement regardless of which bidder was the subject of the market rumours leading to the announcement. After an offer period has started there is no automatic requirement for the target to announce any new bidders that make an approach. However, where a new bidder is subject to rumours an announcement confirming the identify of that bidder is required.
Protection for target companies against protracted “virtual bid” periods
Any publicly named bidder must, within four weeks after it is named, either announce a firm intention to make an offer, announce that it will not make an offer or, if the target agrees, make a joint application with the target to the Takeover Panel requesting an extension to the deadline. Different deadlines may apply to each bidder although the target may also ask the Takeover Panel to apply a common deadline to all bidders. To avoid bidders putting pressure on targets to agree longer deadlines upfront, the Takeover Panel will normally only grant an extension shortly before the end of the four week period.
Prohibition on break fees and other deal protection measures
Prior to the implementation of the new rules it was widely regarded as market practice for UK targets to agree a range of deal protection measures in favour of bidders, such as implementation agreements, break fees of up to 1% of the value of the target, matching rights and non-solicitation or "no shop" restrictions. These deal protection measures are now prohibited under the Takeover Code, other than in certain limited cases. The new prohibition covers any "offer-related agreements", a term broadly defined to include any agreement, arrangement or commitment between the target and the bidder (or any person acting in concert with them), either during the offer period or when an offer is reasonably in contemplation, including, for example, implementation agreements, exclusivity agreements and break fee arrangements. Break fees are still permissible in certain limited circumstances, such as where the target is in serious financial distress or where it initiates a formal sale process.
The Takeover Panel has, however, recognised that a target may have a legitimate interest in entering into certain types of arrangements with a bidder, such as confidentiality agreements, non-solicitation agreements relating to the target's employees or customers, arrangements to provide information needed to satisfy conditions to the offer or regulatory consents, irrevocable commitments or letters of intent, reverse break fees from the offer or to the target or standstill agreements. These arrangements are permitted but any other forms of undertakings from the target are not prohibited. Agreements between the target and the bidder entered into in the ordinary course of business are still allowed under the new rules.
Enhanced disclosure of financial and other information, including offer-related fees and expenses
Under the new rules, cash offerors must now disclose the same level of financial information in the offer document as share offerors. Details of offer related fees, including advisor and financial fees, must also be disclosed. Debt facilities and other instruments entered into by the offeror to finance the bid must now be disclosed in greater detail. The Takeover Panel has, however, recognised that structures used by private equity offer vehicles may be commercially sensitive and it is not, for example, necessary to disclose the leverage within such funds or the split, categorisation or identity of limited or general partners or other participants in the equity financing.
Greater recognition of the interests of target company employees
Increased levels of disclosure in relation to an offeror's intentions for a target company and its employees have been introduced. The rules now require that, except with the consent of the Takeover Panel, statements regarding an offeror's intentions for a target or its employees, location of business and fixed assets (or the absence of any such plans), must hold true for at least one year following the offer completing (or any longer period stated by the offeror).
The rights of employee representatives to make known their views on a proposed offer have also been enhanced. Target boards are now required to inform employee representatives at the earliest opportunity of their right to circulate an opinion on the effects of the offer on employment.
Opinion of the target board
The revised rules clarify that the Takeover Code does not limit the factors that the target board may take into account in giving its opinion on an offer. In particular, in reaching a conclusion as to whether to recommend a bid, the target board is not bound to consider the offer price as the determining factor and it may take into account any other factors which the board considers relevant.
How will bidders respond?
The changes to the Takeover Code mean that boards of UK target companies now have greater protections against unwelcome bids. Once their interest in a target has been made public, bidders are required to clarify their intentions in a short period, so they will no longer be able to subject targets to protracted "virtual bids". This is likely to lead to an increased emphasis on secrecy in the lead up to bids to avoid rumours which might trigger an announcement and a four week "put up or shut up" deadline. Bidders will also need to consider carrying out more of the preparatory work up front to avoid the situation where they are named before they are ready to proceed with a bid. On the other hand, it will be interesting to see how the four week deadline works in practice as targets may come under pressure from their own shareholders to extend deadlines to allow bidders to put forward their best offer.
The prohibition on break fees and implementation agreements may mean that bidders are likely to make increased use of the limited forms of deal protection still permitted under the Takeover Code, such as irrevocable undertakings from shareholders to accept an offer. Bidders may also be more inclined to build up a stake in the target prior to an approach so as to have a stronger starting position before announcing a bid, although UK disclosure rules will limit ability their ability to acquire significant stakes without showing their hand. The new rules may also mean that bidders may prefer to choose to structure bids as offers rather than schemes of arrangement in order to retain a greater degree of control over the transaction now that implementation agreements are no longer permitted.
The new rules outlined above should be seen as an attempt to redress the balance which in the Takeover Panel's view had in the past been strongly in favour of bidders. However, notwithstanding these changes the UK's takeover regime arguably remains more bidder and shareholder friendly than many other jurisdictions and the general principle still stands that the target board must not deny its shareholders the opportunity to decide on the merits of a bid.
William Charnley is a partner in Mayer Brown's Corporate practice, with many years experience in public and private mergers and acquisitions, disposals, flotations and other issues, private equity transactions and general corporate and securities advice. He has a particular focus on private equity, hedge funds and financial institutions.
He has worked across many industries and has experience in the banking and insurance, financial services, telecommunications, technology, oil and gas, hospitality, infrastructure, entertainment and media sectors.
William can be contact on +44 (0) 203 130 3383 or by email at email@example.com
Connor is a senior associate in the Corporate department of the London office. He advises on international and UK corporate and commercial transactions with particular experience in public and private M&A and equity capital markets work for corporate clients and financial institutions. Connor also advises on general company law and corporate governance matters.
Connor spent six months on secondment to the corporate legal department of Santander UK plc in 2010.
Conner can be contacted on +44 (0) 203 3130 3571 or by email at firstname.lastname@example.org