The takeover of Cadbury plc by Kraft Foods Inc in early 2010 caused a storm of protest and calls for change to the UK takeover regime. As a result, significant changes to the Takeover Code will take effect on 19 September 2011.
The changes are intended to reduce the tactical advantage which hostile bidders are perceived to have had in recent times and to redress the balance in favour of target companies. They also seek to improve the offer process and to take more account of the position of target employees.
The principal changes relate to statements made by the bidder about its future intentions, virtual bids, deal protection measures such as break fees, increased disclosure of professional fees and details of offer financing arrangements and the ability of employee representatives to make their views known.
Bidder's intention statements
One of the things that caused the most bitterness over the Cadbury takeover was Kraft's decision to close the Somerdale plant, despite having stated during the offer that it believed it would be in a position to keep the plant open.
The Code currently requires bidders to state their strategic plans for the target company and their intentions with regard, for example, to the continued employment of employees. However, there is no indication of how long a bidder would be expected to adhere to these statements following a successful takeover.
The revised Code makes it clear that, where bidders specify that such a statement will apply for a particular period, they will be held to this. If no period is specified, they will be expected to adhere to their statements for a period of 12 months. They will only be excused if there is a material change of circumstances.
Bidders' statements of intention should be as detailed as possible on the basis of the information available. Statements of a general nature are unlikely to be acceptable in a recommended offer, but it might be legitimate for a hostile bidder which has not had an opportunity to carry out full due diligence to state that it will undertake a review of the target's business once it has obtained control.
Bidders will also be required to make negative statements if they have no intention to make any relevant changes.
Virtual bids, where it is known that a potential bidder is interested in a target but has not yet committed itself to make an offer, can be very disruptive for the target company especially if the uncertainty continues for a long time. The revised Code will therefore require a bidder to clarify its intentions within 28 days of it being identified as a potential bidder.
Currently, a target board can apply to the Takeover Panel to impose a "put up or shut up" deadline on a virtual bidder. The potential bidder must then either announce a firm intention to make an offer for the target, or confirm that it will not be making an offer, by the deadline set by the Panel. Under the new rules, the 28 day deadline will apply automatically, unless the Panel agrees to an extension at the request of the target.
The 28 days starts with the first announcement identifying the potential bidder. Such an announcement can occur in two ways - a "bear hug" announcement by the bidder of its potential interest, designed to get target shareholders to pressurise the board to engage with the bidder, or an announcement required by the Code because rumours are starting to circulate or there is an untoward movement in the target's share price. The revised Code will require the potential bidder to be identified in this second sort of announcement.
Break fees and other deal protection measures
It has become common in recommended offers for the target board to agree to pay a break fee to the bidder if, for example, the board later decides to withdraw its recommendation. Such fees are currently permitted by the Code if the amount is de minimis (generally no more than 1% of the value of the target) and the target and its financial adviser confirm to the Panel that they think it is in shareholders' best interests.
Target boards also sometimes agree other deal protection measures, such as undertakings not to solicit other offers and to inform the original bidder as soon as any other approach is received or to allow the original bidder an opportunity to match or top any higher competing offer.
The Panel believes that such deal protection measures, including break fees, are detrimental to shareholders as they might deter competing bids or lead to such bids being made on less favourable terms. They are therefore prohibited under the revised Code.
Certain arrangements are excluded from the prohibition, including confidentiality obligations and agreements not to solicit employees, customers and suppliers. The Panel may also grant dispensations in certain circumstances, for example, to allow break fees (provided they are in aggregate de minimis) or other deal protection measures to be offered by the target to one or more "white knights" if it is subject to a hostile bid. Amendments are also made to the Code to deal with the implementation of offers by way of a scheme of arrangement.
Disclosure of fees and offer financing arrangements
Bidders will be required to provide more details of how the offer is to be financed, with equity financing arrangements being disclosed in broad terms and specific details being provided about debt facilities. Financing documents will have to be put on display, without the blanking out of any commercially sensitive information. However, the Panel accepts that a bidder would be commercially disadvantaged if it had to disclose any headroom it may have agreed with its banks to enable it to revise its offer. It is likely to grant a dispensation from disclosure of any such agreed headroom.
In addition, the revised Code will, for the first time, require both the bidder and the target to disclose an estimate of the aggregate fees and expenses they expect to incur in connection with the bid, broken down into categories including financial, legal, accounting and public relations advice and, in the case of the bidder, its financing arrangements.
Where a target board makes an announcement under the Code relating to a possible offer, the revised Code requires the board to make the announcement available to its employee representatives. At the same time, it must inform them of their right to have an opinion on the effects of the bid on employment appended to the target board's circular responding to the bid. If the employee representatives' opinion is not received in time for it to be appended to the target circular, the target must promptly publish it on a website.
The revised Code also makes it clear that the target company must bear the costs of publishing the employee representative's opinion, and also for any costs reasonably incurred in obtaining advice required to verify the information contained in their opinion. This is limited to the costs of verification by reference to existing sources and would not extend to commissioning new research or to general advice in relation to the preparation or content of the opinion.
Click here for the Response Statement by the Code Committee of the Takeover Panel following its review of certain aspects of the regulation of takeover bids. This includes, in Appendix B, a mark up of the amendments to the Code which take effect on 19 September 2011.
Click here for guidance on implementation of the changes and transitional provisions.
For further information, please contact:
020 7002 8518
Professional Support Lawyer
020 7002 8542
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This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.