The UK takeover regime - significant changes to the Takeover Code
Gillian Fairfield
Herbert Smith
London
Gillian Fairfield (Bio)
Kraft's takeover of Cadbury in 2009/2010 triggered significant public debate in the UK about how takeovers, particularly hostile takeovers, were conducted. Critics queried whether the existing regulatory regime meant that it was too easy for a hostile bidder to gain control of a UK target and whether sufficient account was taken of stakeholders, other than shareholders, who are affected by a bid (such as employees). This debate prompted a wide-ranging review of takeover regulation by the Takeover Panel and, following extensive consultation, the final changes to the Takeover Code have now been published and will come into force on September 19 2011.
The most significant changes involve the regulation of virtual bids, a prohibition on deal protection measures and increased disclosure in certain areas.
Virtual bids
The new rules aim to give target companies greater protection against protracted 'virtual bids' (where a potential bidder announces that it is considering making an offer but does not commit itself to doing so). This is achieved by requiring potential offerors to be publicly identified at the start of an offer period and by imposing on named potential bidders an automatic deadline of 28 days by which they must either announce a firm intention to make an offer or walk away.
Under the new rules, where a target is required by the Code to announce that it has received an approach, it will have to name any potential bidders with whom it is in talks or who have made an approach that has not been rejected. By removing a potential bidder's ability to remain anonymous, the Panel is aiming to ensure that potential bidders approach a target only on a more considered basis and make greater efforts to maintain confidentiality than at present. Concerns have been expressed by market participants, however, that being named at an earlier stage in the process may deter bidders from making an approach or cause bidders to withdraw any approach rather than be identified.
Once a potential bidder is named, it will be bound by an automatic 28 day 'put up or shut up' (PUSU) deadline by which it must either announce a firm intention to make an offer or announce that it does not intend to make an offer. This is a significant change to the current regime where a bidder will only be given a PUSU deadline if the target asks the Panel to impose one; typically it would be a number of weeks after an approach before a target makes such a request and bidders are often then given a further six to eight weeks to announce their decision.
The only general exemption from the new 28 day deadline is when the target announces a 'formal sale process' (namely, announces that it is seeking potential offerors) in which case the Panel will not normally require a potential offeror which agrees to participate in the process to be identified.
As a bidder may only have 28 days following a leak in which to finalise financing and due diligence, the new rules will inevitably lead to renewed focus on secrecy among bidders and their advisers in order to minimise the risk of a leak. Bidders are also likely to do more preparation before approaching a target to minimise the risk of early exposure.
Prohibition of deal protection
The new Code contains a general prohibition on inducement fees and other deal protection measures. The Panel was concerned that these had become standard packages, which target boards were often under considerable pressure to accept.
The Takeover Code will prohibit any 'any offer-related arrangement' between a target and a bidder during an offer period or when an offer is reasonably in contemplation. This includes break fees and other measures commonly agreed to protect the bidder's position, such as an agreement not to solicit other offers.
There are limited exceptions from the prohibition: for example it is still possible for a target to give commitments to the bidder relating to confidentiality and non-solicitation of employees, customers and suppliers; and it is still acceptable for target directors to give irrevocable commitments to accept a bid.
A further exception is made for a 'white knight' situation, that is where a hostile offer has been announced and a preferred competing bidder or bidders subsequently emerge. In those circumstances, the target may agree an inducement fee with the preferred subsequent bidder (or bidders).
A target is also allowed to agree an inducement fee with one potential bidder where it has announced a formal sale process.
The prohibition on deal protection measures may result in increased stake building by bidders and in firmer irrevocables being sought from target shareholders to reduce the risk of a bid failing.
Additional protection for other stakeholders
The new Code requires increased disclosure in certain areas, which is aimed at protecting stakeholders other than target shareholders who are affected by a bid, such as employees.
There are new provisions aimed at improving the quality of disclosure of the bidder's intentions regarding the employees, locations of business and fixed assets, with a new express requirement for the bidder to include a negative statement in the offer document if there are no plans in relation to them.
Any party which makes a public statement of intention about any course of action it intends to take after the offer will be committed to that course of action for the time period stated in the statement or, if none is stated, for at least 12 months unless there is a material change in circumstances.
There are expanded disclosure requirements on bid financing and financial information. The parties must also set out their estimated fees and expenses, both in aggregate and broken down by category of adviser (for example, financial advisers, lawyers, accountants).
Employee representatives and employees will also be entitled to receive information about an offer at an earlier stage and to be told of the right to make their views known.