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UK Takeover Code Amendments Come into Effect, Contributed by Alasdair Steele, Nabarro LLP(1)

Tuesday, September 13, 2011

By Alasdair Steele, Nabarro LLP

The Code Committee of the Panel on Takeovers and Mergers has been consulting on proposed changes to the UK City Code on Takeovers and Mergers(City Code) for just over a year. The consultation and resultant changes largely arose following the outcry after Kraft's takeover of Cadbury and particularly the subsequent closure of Cadbury's Somerdale factory near Bristol, despite pledges in the offer document to keep the plant open. Originally, the consultation considered far-reaching ideas such as giving different voting rights to long-term and short-term shareholders and increasing the level of ownership required to control a company beyond the traditional 50 percent level.

Although a number of the more radical possibilities were rejected by the Code Committee earlier in the year, the proposed changes, which were initially unveiled in March 20111 and have now been published in final form,2 make a number of changes to the City Code which will affect the way in which takeover offers are effected. The changes are effective September 19, 2011.

As expected, and despite some last minute lobbying, the final amendments largely reflect the Code Committee's previous conclusions and the draft proposals published earlier this year.

The main themes of the changes are:


  • Shifting the balance of power from offerors to target companies;

  • Ending break fees, exclusivity and other deal-protection arrangements;

  • Increasing transparency on advisers' fees;

  • Holding offerors to account for their statements of intention; and

  • Increasing employee involvement and information in offer processes.


Changes to the Takeover Code
— "Virtual Bid" Periods

The default requirement in all takeover situations will be that potential offerors must be publicly named and then have a fixed 28-day period to either make their offer or withdraw from the process entirely. The 28-day period may only be extended on the joint application of the offeror and offeree to the Panel. This switches the onus away from the offeree board having to approach the Panel for a "put up or shut up" deadline, in the event an offeror is laying siege to a target for a prolonged period of time without being identified.

This new requirement to identify a potential offeror will only apply when an announcement of a potential offer is required, and as a result, potential offerors will be further encouraged to protect the confidentiality of the process for a longer period of time. Potential offerors will not, however, be able to restrict (or attempt to restrict) the offeree from disclosing their identity where there City Code requires that disclosure.

The Panel is expected to be receptive to requests to extend the 28-day period, particularly where good reasons can be shown why the process is taking longer. Friendly, recommended offers should therefore be able to proceed on a slightly slower timetable while hostile or unwelcome offerors will be forced to move with much more decisiveness.

There is a limited exception from the proposed identification regime and time limits where an offeree announces that it is conducting a formal sale process and seeking one or more potential offerors. The details of the sale process and proposed participants will not then need to be made public. In order to qualify for this exemption, the offeree will need to formally put itself up for sale; traditional "strategic review" announcements, often seen as code for putting themselves up for sale, will not be sufficient.

— Deal Protection Measures

Deal protection measures will be completely prohibited except in very limited circumstances. The restriction will apply to "offer-related arrangements," which are generally defined as "any agreement, arrangement or commitment in connection with an offer" and will apply to currently common arrangements such as:


  • Inducement fee and break fee arrangements;

  • Implementation agreements;

  • Exclusivity arrangements; and

  • "Work-fee" arrangements.


Inducement fees will still be permitted in exceptional circumstances such as where a "white knight" offeror3 makes an offer following the announcement of a hostile offer. The inducement fee will, however, be of limited value as it will only apply if a third competing offeror were to materialise and succeed, not if the original hostile offeror were to succeed.

As anticipated, the City Code itself will now contain specific provisions regarding takeovers which are implemented by way of schemes of arrangement to ensure that offeree companies adhere to any timetable and process agreed with the offeror and included in the offer documentation.

— Disclosure of Fees

The estimated fees payable by offerors and offerees will need to be disclosed in offer documents. These will be broken down by category of adviser, with the fee for each of the offeror and offeree and in respect of the offeror's financing arrangements being split out separately.

The new rules address different fee structures, such as success fees, by providing the ability to disclose expected fees and maximum fees so as to protect commercially sensitive information, such as the thresholds at which success fees may kick in. Where the disclosure subsequently proves inadequate, updated information may need to be publicly announced.

— Increased Disclosure Requirements

Increased disclosure about the financing of offers will be required, with copies of the financing documents to be made available on the offeror's website. Certain commercially sensitive information, such as headroom to increase an offer, may be withheld, as may the structure by which equity is provided to private equity offeror vehicles; a general disclosure as to how much is sourced from each fund will be sufficient.

Separately, all-cash offerors need to disclose additional information, putting them on par with offerors offering securities as consideration, though this will not extend to information such as a pro forma balance sheet reflecting the offer and significant change statements since their last audited accounts.

— Statements as to Future Conduct

Following the public and political criticism following Kraft's closure of Cadbury's Somerdale factory, the City Code is being strengthened to try to force more and better disclosure.

Offerors will be required to include enhanced statements of their intentions for the offeree business and its employees as well as information about the effect of the offer on its own business. They will then be expected to hold to those statements for either any period specified in the statement or, in the absence of any statement, at least 12 months following the offer becoming unconditional. Offerors will only be released from these statements if there has been a material change in circumstances.

In order to counter the risk that the new rule will encourage vague and general statements, the Code Committee has stated that an offeror should disclose as fully as possible its commercial rationale for the takeover and that general statements are unlikely to be acceptable where an offeror has had an opportunity to undertake full due diligence.

— Employee Involvement

Employees and employee representatives will have enhanced rights to comment on the effects on employment of a proposed offer and to have their costs in obtaining advice to verify the information contained in their opinion paid for by the offeree company.

The Code Committee has stated its view that the costs should be limited to those required to verify the statement by reference to existing sources and not to the provision of general advice as to the opinion or to the commissioning of new research to substantiate an opinion. However, it is likely that there will be debates in the future over the extent of the costs which will be covered, particularly in takeover situations which attract employee and trade union opposition.

In addition, offeree companies will be required to publish the opinion of the employees or employee representatives on their websites (and announce having done so) when the opinion is received too late to be included in the offer documentation. Under the old rules, there was no provision requiring this opinion to be published if it was not received in sufficient time to be included within the offer documents.

Transitional Provisions
— "Virtual Bid" Periods

Where an offeree is in an offer period on the implementation date and if it was in talks with or had received an approach from an offeror at the beginning of the offer period, the identity of the potential offeror will need to be announced by 5 p.m. on the implementation date.

Separately, any potential offeror identified in an announcement made on or before the implementation date must, by not later than 5 p.m. on the 28th day after the implementation date, either:


  • Announce a firm intention to make an offer;

  • Announce it does not intend to make an offer; or

  • Together with the offeree company, obtain Panel consent to an extension of the deadline.


— Deal Protection Measures

Inducement fees or other offer-related arrangements entered into before the implementation date will not be subject to the new prohibition.

— Offer Documents & Offeree Board Circulars

Where the offeror publishes the initial offer document before the implementation date, all subsequent offer-related documents must comply with the City Code's provisions as they were before the implementation date, irrespective of when those documents are published.

— Employee Involvement

Offeree companies will be required to publish employee representatives' opinions on a website and announce having done so with effect from the implementation date, even if the offer document to which the employee representatives’ opinion relates was published before the implementation date.

Conclusion
Despite the extensive nature of these changes, the Code Committee has already flagged future areas of amendment, such as imposing an ongoing obligation to update material information as it changes, and not only when the next offer-related document is published.

Alasdair Steele is a corporate partner at Nabarro LLP, specialising in UK and cross-border corporate finance, including public and private M&A, strategic investments and primary and secondary equity issues, as well as regularly advising on consortia and corporate joint venture arrangements, particularly in the infrastructure sector. He regularly advises quoted companies and financial intermediaries on the UKLA Listing Rules and Disclosure Rules, the Prospectus Rules, the AIM Rules, the Takeover Code, corporate governance matters and general company law. Telephone: +44 (0) 20 7524 6422; E-mail a.steele@nabarro.com.

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