Redressing the balance in favour of the offeree company, and improving the offer process
UPDATE 22 July 2011: The changes to the Takeover Code will come into force on 19 September 2011 - see this post.
Kraft’s takeover of Cadbury in 2010 provoked concern in corporate Britain that the public company takeover process, as governed by the Takeover Code (the Code) and the Panel on Takeovers and Mergers (the Panel), had become too tactically advantageous to hostile bidders. Lord Mandelson, the then Secretary of State, and Roger Carr, the then chairman of Cadbury, both expressed their view that the balance should be redressed in favour of the offeree company.
In response, the Code Committee of the Panel issued a consultation paper in June 2010, seeking views on possible amendments to the Code, and that paper was followed by a statement in October 2010. As the next step in the process of amending the Code, the Code Committee has today issued a further consultation paper (the Paper) on “certain aspects of the regulation of takeover bids”. The Paper contains the wording of proposed amendments to the Code.
It is anticipated that these changes to the Code, which remain open to further change but which are likely to see only minor finessing of wording, will come into force in mid to late summer 2011. The consultation is open for comments until 27 May 2011.
The highlights of the Paper are set out in brief below. The Paper can be read here.
Increasing the protection of offeree companies against protracted “virtual bids” periods
One of the controversies of Kraft’s pursuit of Cadbury was Kraft’s protracted reluctance to confirm its intention to make a bid and so to commit itself. This had a destabilising effect on Cadbury, exposing it to uncertainty and disruption. The Code Committee has concluded that:
- Following an approach to the board of the offeree, the potential offeror will be named in the announcement commencing the offer period, irrespective of which party makes that announcement.
- Where an announcement by an offeree company commences an offer period, that announcement should be required to identify any potential offeror with whom the offeree company is in talks or from whom it has received an approach (which has not been unequivocally rejected) with regard to a possible offer.
- And then any publicly named potential offeror must, within a fixed period of four weeks from the date of being publicly named, either (1) announce a firm intention to make an offer, (2) announce that it will not make an offer (and so will be prohibited from making an offer for the next six months) or (3) apply, jointly with the offeree, for an extension of the deadline.
This rule change is aimed at reducing the use of tactical leaks before an offer period, in order to put pressure on the potential offeree. In the Paper’s words, “the knowledge that an offeror will be identified upon the commencement of an offer period should act as an incentive for a potential offeror to ensure that the secrecy of its possible offer is maintained…”.
The requirement that any potential offeror with whom the offeree is in talks must be named will be controversial.
Strengthening the position of the offeree company
A particular feature of public company takeovers in recent years has been the increased use of deal protection measures (such as matching rights and non-solicitation agreements) and inducement fees. These benefit the offeror as they penalise the offeree company in the event that its board decides to withdraw its recommendation of an offer – typically because a higher offeror has been made by a third party - and so may reduce the possibility of a third party bid emerging that might be more attractive to the offeree’s shareholders.
The Paper describes the current position: “…it has now become standard market practice in the context of recommended offers for offerors to have the benefit of a number of deal protection measures, including an inducement fee at the maximum permissible level and that such measures are often presented…as standard “packages” which the offeree board is under considerable pressure to accept with little, if any, room for negotiation”. So the Code Committee has concluded that:
- There should be a general prohibition on deal protection measures and inducement fees, and that this prohibition should extend to any “offer-related arrangement”.
- The prohibition will not apply to such measures and fees agreed between an offeree and a “white knight” offeror. Nor will it apply where the offeree has put itself up for sale.
- “Offer-related arrangements” do not include non-disclosure and non-solicitation of employee agreements, agreement to cooperate with regulators and irrevocable undertakings.
Clarifying that offeree boards are not limited in what they can take into account in giving their opinion on an offer
The Code Committee noted that “there appeared to be a perception among certain market participants that the board of an offeree company is bound by its obligations under the Code to consider the offer price as the determining factor in giving its opinion” on an offer. This has never been the case, and is not the case under general company law. Nevertheless, the Code Committee has concluded that the Code should be amended to clarify that the Code does not limit the factors that the offeree board is able to take into account in considering an offer, and that price is not a determining factor.
Requiring the disclosure of offer-related fees and expenses
Given that shareholders are entitled to know how much of the company’s money is being spent in connection with an offer, and that the disclosure of advisers’ fees may indicate an incentive for that adviser to persuade its client to pursue a particular course of action, the Code Committee has concluded that:
- Each party to an offer should set out an estimate of aggregate fees, and that the estimated fees of each adviser should be disclosed separately, by category of adviser.
- Fees in respect of financing should be disclosed separately from advisory fees.
On a cash offer, it has been the rule that the offeror need provide less historic financial information about itself, as offeree shareholders will have no ongoing interest in the offeror should they accept the offer. However, as other parties – including employees, customers, suppliers and creditors of the offeree and the offeror - will have a continued interest in the combined group, the Code Committee has concluded that equivalent financial information on both offeror and offeree will have to be provided in the offer documents, irrespective of whether it is a cash offer or a securities exchange offer.
Greater recognition of the interests of offeree company employees
Following Kraft’s statements regarding its intentions in relation to the future of one of the Cadbury manufacturing plants, which proved to be incorrect, the Code Committee has concluded that:
- Offerors should be required to make negative statements if they have no plans regarding the offeree company employee’s, locations of business and fixed assets.
- Offer document statements, and any public statements made during the offer, regarding the offeree company employee’s, locations of business and fixed assets would be expected to hold force for a least year after the offer.
There are also improvements to the ability of employee representatives to make their views on an offer known, including the right to have their opinion appended to offer documents or otherwise published.
Other points of interest
- More detailed disclosure of debt facilities and other debt instruments entered into to finance the offer and refinance existing debt will now need to made.
- A greater range of documents will now need to be put on display upon the firm intention to make an offer announcement, including any irrevocable undertakings and any documents relating to financing of the offer.
- For offers made by way of scheme of arrangement, there will be an obligation on the offeree to post the scheme document within 28 days of the firm intention to make an offer announcement, and there are other rule changes to ensure compliance with a published scheme timetable.
- Rating agency ratings of both the offer and the offeror will need to be disclosed in the offer documents.
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