By Leon Ferera and Simon Kiff, Jones Day
The takeover of Cadbury Plc by Kraft Foods Inc. in early 2010 prompted widespread public discussion about the regulation of UK takeovers. Concern was expressed that it was too easy for a hostile offeror to obtain control of an offeree company and that the outcomes of takeovers, particularly hostile offers, were unduly influenced by the actions of short-term investors.
In June 2010, the Code Committee of the Panel on Takeovers and Mergers (Panel) issued a public consultation paper1 containing suggestions for amendments to the City Code on Takeovers and Mergers (the City Code) to address these concerns.
The purpose of the proposed amendments was to:
The consequences of these changes are wide ranging. The ability to extend the period is so uncertain that it cannot be factored into any sensible bid planning. In most cases the preparations, including due diligence, required to get to the stage of a cash confirmed firm intention announcement will take significantly longer than 28 days (and often several months), particularly where a lender is involved. There is therefore concern that 28 days will not be long enough for many bidders, particularly hostile bidders who are unlikely to benefit from an extension.
A number of respondents to the consultation argued that an offeror should be entitled to conduct a bid in secrecy before its due diligence confirms that a bid is worth pursuing. In particular, the British Private Equity and Venture Capital Association argued that to require an offeror to be named too early could result in an association of the offeror with "failed bids" when, in practice, the supposed offeror was only involved in initial due diligence. Potential offerors may also be able to manipulate the provisions by leaking information, resulting in an announcement being required naming any competing offers or forcing such offerors to withdraw and not re-bid for up to six months. All of these factors could discourage legitimate potential offerors from putting forward proposals that could benefit target shareholders and cause poorly performing boards not to be held to account for their actions.
Complex deal protection measures had become commonplace in recent years and there was concern that target boards had little choice but to accept them and that they had the effect of deterring other bidders. The reason for the prohibition, therefore, is to strengthen the offeree’s position and to avoid a situation where competing offerors are deterred or offer less favourable terms. However, there is an argument that the prohibition on all but a very limited number of basic protections has gone too far in the other direction. Bidders have traditionally utilised inducement fees as protection against potentially wasted time and money spent on pursuing abortive transactions. The abolition of fees may be particularly damaging to private equity buyers who may have a limited ability to pay fees prior to drawing down from their fund to make an offer and may deter potential bidders from the risk of incurring potentially wasted costs. The abolition of non-solicitation undertakings might have a similar effect: potential bidders might be loath to act as stalking horses and spend time and money pursuing an offer only for the target to be able to solicit other bids at the same time.
The Panel takes the view that increased transparency on fees will help lower offer-related costs and avoid situations where advisers charge high fees for advice that might not necessarily be in the best interests of their clients. While there is merit in this, having to provide an estimate might turn out to be challenging if the estimate has to cater for unexpected events. It could also be misleading if the estimate turns out to be too high or too low.
First, all bidders will need to disclose details of their bid financing arrangements, including: the amounts being borrowed; all fees (e.g., drawdown fees and commitment fees); repayment terms; interest rates; and, and key covenants. However, the Code Committee acknowledges that the amount of any potential increase in a facility (i.e., "headroom") that the offeror might have agreed with its financing banks will be a matter of particular commercial sensitivity and will not have to be disclosed provided it is set out in a separate standalone document. Private equity firms and other leveraged buyers have expressed concern that this requirement may discourage many lenders from providing finance for takeover offers.
Secondly, a bidder will have to disclose certain additional financial information: the last two audited consolidated accounts (this will be required for all offers, not just securities offers as has been the case up to now in certain circumstances); a statement of the effect of full acceptance of the offer on its earnings, assets and liabilities; credit ratings, summary details of any outlook, such as whether the long-term and/or short-term debt ratings were on "negative watch" and details of changes to the ratings and outlooks during the offer period, including reasons for those changes (offerees will have to disclose similar details); and, in the case of a securities-exchange offer, details of any significant change in its financial or trading position since the end of the last financial period for which either audited financial information or interim financial information has been published (or an appropriate negative statement).
Many questions have been raised about the merit of including details of ratings: they can be subjective, are not always reliable and numerous ratings agencies exist. It could be onerous to include the ratings given by all of them.
As was the case previously, a bidder will be required to state, amongst other things, its intentions with regard to the continued employment of target employees and management, its strategic plans for the target and its intentions regarding the future business of the target. However, if the bidder has none, it will now be required to make a negative statement. In addition, the Panel will enforce compliance with any statement of intention, or negative statement, regarding the target made by the offeror or the offeree for 12 months or such other period as the relevant party specifies, unless there has been a material change of circumstances.
This raises the question as to how an offeror which has not had an opportunity to undertake full due diligence will comply with the new regime. The Code Committee has stated that it recognises that the new requirement may lead to such statements of intention, and/or negative statements, being made subject to certain qualifications but considers that it is preferable for an offeror to make a detailed, albeit qualified, statement rather than a general unqualified one. It also acknowledges that it might be legitimate for a hostile offeror which has not had an opportunity to undertake full due diligence on the offeree company to state that it will undertake a review of the offeree company’s business once it has obtained control of the company. However, the Code Committee believes that the offeror must have a fundamental business rationale for seeking to acquire the offeree company, which it should disclose as fully as possible. It also considers that statements of a general nature are unlikely to be acceptable in the context of a recommended offer where the offeror has had an opportunity to undertake full due diligence.
Targets will now also be required to remind employee representatives of their right to have their opinions on the offer appended to the target board’s circular if they are received in good time prior to its publication. If not received in good time, target companies will need to disclose the opinion on their websites and announce their posting on their websites. The "reasonable" cost of funding any professional advice for obtaining the opinion will now be for the account of the target. Little guidance has been provided as to what are "reasonable" costs.
Leon N. Ferera is a partner at Jones Day and former secondee to the Takeover Panel where he was also the Secretary to the Code Committee. Leon advises companies involved in a wide range of industries on M&A transactions. His experience includes acquisitions, disposals, private equity transactions, joint ventures, and equity subscriptions. He also has experience on capital markets transactions. Leon is a member of the working group on takeovers of the Corporate Finance Faculty of the Institute of Chartered Accountants in England and Wales. Telephone: +44 (0) 20 7039 5213; E-mail: firstname.lastname@example.org.
Simon Kiff is a senior associate at Jones Day practising primarily in M&A and private equity. He advises a wide range of institutional and corporate clients on public and private acquisitions and disposals (domestic and cross-border), MBOs, MBIs and joint ventures. Telephone: +44 (0) 20 7039 5323; E-mail: email@example.com.
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