One of the most highly regarded M&A lawyers in the world provides his market leading analysis on the proposed changes to UK takeover rules.
The UK has been described as “one of the world’s most open regimes for takeovers and among the biggest venues for deal-making outside the United States”, however, on 21 October 2010, the Takeover Panel (the Panel) proposed some significant reforms to the regulation of takeover bids in the UK. The paper was produced as a response to the Panel’s June 2010 Consultation Paper, entitled “Review of Certain Aspects of the Regulation of Takeover Bids”, which was published in light of the well publicised, and some might say controversial, takeover by the US food giant Kraft Foods Inc of the much loved British producer of chocolate, Cadbury plc. The controversy prompted business leaders and politicians to question whether the UK’s openness was harming long-term interests. The Panel, as a result, launched the most far-reaching review of the regime in decades.
While examining the conduct of takeovers generally, the Panel addressed specific areas, which included taking note of the views expressed by certain commentators that it has become too easy for ‘hostile’ offerors to succeed and that the outcome of offers (particularly hostile offers) may be influenced unduly by the actions of ‘short-term’ investors. As Lord Mandelson put it:
“In the case of Cadbury Kraft it is hard to ignore the fact that the fate of a company with a long history and many tens of thousands of employees was decided by people who had not owned the company a few weeks earlier, and who probably had no intention of owning it a few weeks later”.
The consultation has resulted in the Panel proposing various changes to the City Code on Takeovers (the Code).
The Proposed Amendments
The reforms which have been proposed were aimed at enhancing the offer process generally rather than addressing the concerns that it has become too easy for “hostile” offers to succeed and that the outcome of offers may be influenced unduly by the actions of so called “short-term” investors. It is argued that the Code should aim to ensure that the outcome of a takeover bid is determined primarily by the long-term shareholders of the offeree company, who will have a greater commitment to, and better understanding of, the company, its management and its employees than those shareholders who are driven by short-term trading strategies.
The reforms which are expected to have the greatest impact on the way in which takeovers are conducted include the new automatic deadline for offerors to “put up or shut up” within four weeks of being publicly named as an offeror, and the general prohibition on all deal protection measures, including break fees.
What The Panel Decided To Change
Requiring potential offerors to clarify their position within a short period
The proposed amendments to the Code would require that a potential offeror who has made an approach be named in the announcement which commences an offer period, regardless of which party publishes the announcement, and any publicly named offeror must “put up or shut up” within a fixed period of four weeks of being publicly named, unless the potential offeror applies to the Panel jointly with the offeree company to extend the deadline.
These changes are directed at providing protection to offeree companies from the speculation which surrounds whether or not an offeror is going to announce a firm intention to make an offer. This would of course apply to offerors who are named in leaks at the very early stages of considering whether to make a bid.
Some commentators have said that offeror strategy and planning will be affected by this alteration and it is likely that offeror companies, especially those requiring significant financing arrangements, will require longer than four weeks to be ready to announce a bid. Some might say that under this new change, Kraft Foods Inc may have not been able to launch its bid for the Cadbury business in time due to the significant regulatory hurdles it needed to clear ahead of launch in the US.
This is something which will be further exacerbated by leaks publicly naming the offeror at the very early stages of bid consideration. Commentary speculates that offeror companies might have to implement tighter security regarding their intentions and offeree companies might be induced to tactically leak information.
Prohibiting deal protection measures, including inducement fees, other than in certain limited cases
So that the offeree company may enjoy an enhanced position, the Panel has proposed a prohibition on all deal protection measures including undertakings by the offeree company to implement a bid, or to refrain from taking any action which might facilitate a competing bid. This will include matching action rights or non-solicitation undertakings and inducement fees.
However, legitimate requests for confidentiality of information provided by the offeror, the non-solicitation of an offeror’s employees or customers and the provision of information necessary to satisfy conditions or obtain regulatory approvals will not be outlawed under the new proposals.
The ability to use implementation agreements to structure schemes of arrangement will be significantly reduced by the proposed changes. Recognising that offerors need certainty as to the implementation of schemes, the Panel has proposed an amendment to the Code to require the board of an offeree company to implement the scheme in accordance with a timetable to be agreed with the panel, subject to withdrawal of the board’s recommendation. This has the potential of extending the ability of an offeree company board to walk away from a recommended scheme.
It is apparent that the only instance in which the prohibition on deal protection measures will not apply is where an offeree company’s board has initiated a formal public auction process.
It is thought that bidders will need to refocus their energies on seeking non-contractual deal protections such as stake building and obtaining irrevocables.
Commentary suggests that the loudest objections are likely to be heard from private equity houses and other financial buyers as this may alter the risk analysis sufficiently to prevent bids being made by them.
Speculation has arisen as to whether the prohibition will hinder the target’s ability on a hostile bid to find a more welcome second bidder. It is thought that the second bidder may be put off by the lack of protection it will be afforded to prevent it from being trumped by the first bidder.
Clarifying that offeree company boards are not limited in the factors that they may take into account
Offer price has always been the key driver in takeover bidding wars; however, a changing market perception has meant that the Panel has proposed amendments to the Code to clarify that offer price is not the only factor that offeree boards are able to consider.
However, factoring in the offeree boards’ statutory requirement to act in accordance with their directors’ duties (specifically the duty to act in a way that is most likely to promote the success of the company) and unless the offeree company board is able to conclude that the acquisition is detrimental to the offeree company, general opinion is that it is likely that offer price will continue to be a key factor for a board to consider when deciding upon which bid to accept.
Requiring The Disclosure Of Offer-Related Fees
To improve transparency, the Panel has proposed amendments to the Code to require the following: that estimated fees for each party are set out in the offer document or first offeree board circular, both in aggregate and by category of adviser; financing fees are disclosed separately from advisory fees; and any material changes to the disclosed estimate fees are announcement promptly. The Panel has clarified that any such disclosure will have to be in a manner that does not reveal commercially sensitive information regarding the offer.
While enhancing transparency for the shareholders who will ultimately foot the bill, some are of the opinion that in light of the bankers’ bonuses debate, this will pose more of a problem to lawyers and financial advisers as journalists get wind of the level of fees charged. The core aspects of a bid may be overlooked as the press focuses on lawyers’ fees in the bid to sell a story.
Requiring the disclosure of the same financial information in relation to an offeror and the financing of an offer irrespective of the nature of the offer
The Panel has proposed the following: that detailed financial information in respect of an offeror is contained in all offers and not only in the case of securities exchange offers; where the offer is material in relation to the offeror, that offer documents include a pro forma balance sheet of the combined group and details of the rating attributed to the offeror by credit rating agencies; greater disclosure of debt facilities, irrespective of whether the servicing of those facilities depends to a significant extent on the business of the offeree company; and all documents relating to the financing arrangements to be put on public display.
Improving the quality of disclosure in relation to the offeror’s intentions regarding the offeree company and its employees, and improving the ability of employee representatives to make their views known.
Perhaps prompted by a more difficult economic climate, but more likely to be linked to the unfulfilled intentions of Kraft Foods Inc regarding the Cadbury Somerdale factory, the Panel has sought to improve the quality of disclosure and to enable employees’ representatives to be more effective in providing their opinion on the effects of the offer on employment. The proposed changes cover the following:
• clarifying that the Code does not prevent information bring provided to employee representatives in confidence during the offer period;
• requiring the offeree board to inform employee representatives at the “earliest opportunity” of their right under the Code to circulate an opinion on the effects of the offer on employment;
• that the offeree board must publish the employee representatives’ opinion at the offeree company’s expense; and
• requiring the offeree company to pay the costs of obtaining advice reasonably required for the verification of the information in the employee representatives’ opinion.
The Panel has also proposed amendments to clarify that statements in offer documents regarding an offeror’s intentions in relation to the offeree company will be expected to hold true for a period of at least one year.
What The Panel Did Not Change
Commentators put forward a number of suggestions for amending the Code with a view to making it more difficult for hostile offerors to succeed, including amending the rules which were designed to reflect the provisions of company law and raising the minimum acceptance condition threshold for offers above the current level of “50 per cent plus one” of the voting rights of the offeree company. This was not implemented.
The Panel also decided not to adopt overriding basic economic rights (in the case of disenfranchising shares acquired during the offer period). An important argument against this is that it would appear to be contrary to General Principle 1 of the Code (identical to article 3(1)(a) of the Takeover Directive (2004/25)) that all holders of the securities of an offeree company of the same class must be afforded equivalent treatment. There is an argument that there is no objective justification for treating short-term shareholders less favourably than long-term shareholders of the same class and that it is not for the Code to disenfranchise shares acquired during the offer period in the absence of amendments being made to company law (and, potentially, to the Directive).
Finally, the Panel chose not to implement extending the Code to apply to matters that are currently the responsibility of other regulatory bodies (in the case of providing protection to shareholders in offeror companies). The Panel concluded that an amendment of this nature would be too great an expansion of its power, might involve the inappropriate extraterritorial application of the Code in the case of offerors incorporated in other jurisdictions, and might create an unequal playing field between competing offerors unless applied equally to all offerors (some of which may not even have shareholders).