reforms to the uk takeover regime a guide · > it had become too easy for hostile offerors to...
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15 September 2011
Reforms to the UK takeover regime – a guide
What is happening?
The UK takeover landscape will change significantly on 19 September 2011,
particularly in relation to “virtual bids”.
The reforms can broadly be categorised as changes:
> that will materially impact “virtual bids”, particularly by hostile offerors;
> to prohibit the deal protection measures (including inducement fees)
that have regularly been given to recommended offerors in recent
years; and
> to increase the quality of disclosure of certain information and to
provide greater recognition of the interests of offeree company
employees.
The reforms have the potential to change significantly the balance of power
between offerors and offeree companies and the ability of offeree boards to
determine the outcome of a proposed offer.
Background to the Reforms
These reforms arose as a result of the takeover of Cadbury plc by Kraft
Foods at the beginning of 2010. This takeover attracted widespread public
and political discussion on a number of aspects of the Takeover Code
(including suggestions for amending the Takeover Code being made by the
Secretary of State for Business, Innovation and Skills and others, including
the former chairman of Cadbury).
In summary, concerns were expressed that:
> it had become too easy for hostile offerors to succeed; and
> the outcome of offers, and particularly hostile offers, may be influenced
unduly by the actions of so-called short term investors.
In response to that debate, in February 2010, the Takeover Panel initiated a
consultation to consider whether certain Takeover Code provisions and the
timetable for determining the outcome of offers could usefully be improved.
On 21 July 2011, following the consultation process which received an
unprecedented volume of responses, the final reforms to the Takeover Code
were published.
In this issue What is happening? .......... 1
Takeover Code reforms in detail ................................. 2
Restrictions on “virtual bids” .............................. 2
Prohibition on inducement fees and other deal protection measures ...................... 6
Schemes of arrangement ...................................... 8
Enhanced disclosure of information .................... 8
Greater recognition of the interests of offeree company employees ... 11
Miscellaneous amendments ............... 13
Key Questions on the Practical Impact of Takeover Code Reform .. 14
Appendix 1: Transitional Arrangements ................. 24
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The key changes are:
> potential offerors (i.e. those in active talks or who have approached the
offeree company and not been unequivocally rejected) must be
identified by the offeree company at the start of an offer period;
> put up or shut up (“PUSU”) deadlines automatically fixed at 4 weeks
from the start of an offer period;
> offeree company free to obtain an extension to a PUSU deadline for a
welcome offeror (and not, if it so chooses, an unwelcome offeror, even
if there are multiple potential offerors);
> deal protection arrangements (including inducement fees) will generally
be prohibited;
> increased engagement with employee representatives;
> enhanced disclosure of financing arrangements and financial
information in offer documentation; and
> detailed disclosure of advisers' fees in offer documentation.
This guide focuses on the key practical implications arising out of the reforms.
For further background information on the reforms, please see the Takeover
Panel papers dealing with the consultation and the response to the
consultation: PCP 2010/2, PCP 2011/1 and Response Statement 2011/1.
Takeover Code reforms in detail
Restrictions on “virtual bids”
Naming potential offeror
Where an offer period starts with an announcement by an offeree company, it
will be mandatory for the offeree company to name the potential offeror with
whom it is in talks or from whom it has received an approach in the
announcement which starts the offer period. The Code is also amended to
make it clear that potential offerors cannot contractually seek to prevent their
identity being disclosed. A potential offeror will not need to be identified if an
offeree company is not in an offer period.
See new Rule 2.4(a) and Rule 2.3(d).
Announcement by a potential offeror
Where an offer period starts with an announcement by a potential offeror, no
announcement is required by an offeree company of any other potential
offerors.
Formal Sale Process
The naming of a potential offeror will not apply if the offeree company
launches a formal sale process (see “exceptions to naming potential offerors
and PUSU requirements” below).
“We don't expect
fundamental
changes in
recommended bid
situations where
there is no
obvious
interloper risk”
Nick Rumsby
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Multiple potential offerors
See “multiple potential offerors” below.
Automatic 4 week PUSU deadlines
At the start of an offer period, there will be an automatic, compulsory PUSU
procedure which will give a potential offeror 28 days from the date it is
identified either to announce a firm intention to make an offer or confirm that it
will not make an offer. This is designed to give offeree companies more
certainty over how long an offer period will last and avoid them being under
“siege” for unnecessarily long periods and to avoid offeree companies being
criticised by shareholders for asking for a PUSU deadline to be set too early
following an announced approach.
See new Rule 2.6(a).
Extending the 4 week deadline
The 4 week deadline will normally be extended by the Takeover Panel if so
requested by the offeree company. In considering a request for such an
extension, the Takeover Panel will take into account the status and
anticipated timetable for completion of negotiations. Such an extension will
normally only be granted towards the end of the 4 week period.
Upon the grant of an extension the offeree company must promptly make an
announcement and comment on the status of negotiations and the
anticipated timetable for completion of the negotiations.
See new Rule 2.6(c) and Note 1 on Rule 2.6.
Formal Sale Process
The automatic setting of a 4 week PUSU deadline will not apply if the offeree
company has launched a formal sale process (see “exceptions to naming
potential offerors and PUSU requirements” below).
Multiple potential offerors
See “multiple potential offerors” below.
Multiple potential offerors
Announcement obligations
Approaches received prior to an offer period
Where an offer period starts with an announcement by the offeree company,
all potential offerors with whom the offeree company is in talks or from whom
it has received an approach (which has not been unequivocally rejected by
the offeree company) must be named in the announcement, irrespective of
which potential offeror was the subject of the rumour and speculation which
gave rise to an announcement obligation.
See new Rule 2.4(a).
Approaches received after the start of an offer period
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After an offer period has begun, the offeree company does not need to
announce the existence of a new potential offeror with whom it has begun
talks or from whom it receives an approach after the first announcement.
However, where a new potential offeror is specifically identified in rumour and
speculation, the Takeover Panel will require the offeree company or the
potential offeror to make an appropriate announcement. The Takeover Panel
does not expand on the “specifically identified” test but it is expected that this
will be more than speculation in the form of an educated guess as to who else
might be interested in making an offer and the test is likely to be whether
there has been a leak regarding the new potential offeror.
See new Note 3 on Rule 2.2.
If all identified potential offerors announce that they have no intention to bid,
the offer period will end, notwithstanding that the board of the offeree
company continues to be in discussions with a potential offeror whose
existence is not known to the market.
Identification of white knight/potential offeror after firm offer announcement
If the offeree company has received a firm offer, then, if it subsequently refers
to, but does not identify a white knight, the unidentified white knight will
however be required, by Day 50 of that offer, to announce a firm offer or to
confirm to the offeree company that it will walk away. If the white knight walks
away in this circumstance it will not need to be identified by the offeree
company.
See new Rule 2.6(e).
Clarification of a potential competing offeror’s intentions in later stages of offer
The current practice regarding the setting of deadlines for clarification of the
intentions of a potential competing offeror (that has been named or whose
existence has been disclosed by the offeree) during the later stages of an
existing firm offer (the so-called “Day 50 rule”) is now codified. This will apply
even if the potential offeror was subject to a no intention to bid statement if it
had confirmed its on-going interest.
See new Rule 2.6(d) and (e).
PUSU deadlines
In the case of multiple competing offerors, each potential offeror would be
subject to a 28 day deadline from the date on which it is identified – there will
not be one common deadline for all if they are identified at different times.
Importantly, if an extension is needed, if it wishes to, the offeree company is
able to agree different deadline extensions for different offerors and, if it is
willing to consent to an extension for one potential offeror, need not agree to
any extension for any other offerors. Although this clearly gives the offeree
company the ability to favour one potential offeror over another, any other
offeror would be allowed to re-enter the fray once a firm offer is announced
(by the preferred offeror or any other party).
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The 28 day deadline will no longer apply once a firm offer has been
announced. If a potential offeror has already confirmed that it will not make an
offer, it will no longer be bound by such statement once an offer is made by
another party (including any party whose existence was already known at the
time of such statement).
See new Rule 2.6.
Exceptions to naming potential offerors and PUSU requirements
Formal sale process: the obligation to announce the identity of potential
offerors and the automatic 4 week PUSU deadline do not apply to potential
offerors that participate (and continue to participate) in a formal sale process
which is initiated by the offeree company. However, the formal sale process
exception does not cover strategic review announcements.
See new Note 2 on Rule 2.6.
White knights: as noted above, once an offer period starts, it will remain
open to an offeree company to approach a potential white knight without
triggering an announcement obligation or such white knight being subjected
to the PUSU deadline unless there is a leak specifically identifying the white
knight.
See new Note 3 on Rule 2.2.
Downing tools
The Takeover Panel is codifying its practice regarding “downing tools”. Where
there had been rumour and speculation and/or untoward movement in the
share price of the potential offeree company which would otherwise trigger a
leak announcement obligation in certain circumstances (e.g. if the leak did not
name the potential offeror and very little work had been done), the Takeover
Panel previously might allow a potential unnamed offeror to “down tools” and
avoid the need for an announcement. Such potential offeror would have been
required to down tools (and not actively consider making an offer for the
offeree company) for a period usually of no less than three months, thereby
enabling a potential offeror at a very early stage in the offer process to avoid
the full six month restrictions following a no intention to bid announcement.
However, the “downing tools” time period is being increased from three to six
months meaning that the only advantage going forward will be the ability for a
potential offeror to avoid being named. If the offeree company requests, the
Takeover Panel may consent to the restriction being lifted after 3 months. It is
thought that the Takeover Panel is likely to allow downing tools only in limited
circumstances.
See new Note 4 on Rule 2.2.
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Prohibition on inducement fees and other deal protection
measures
Inducement (break) fees
Inducement fees will be prohibited except in certain situations:
White knights: an inducement fee may be agreed with a white knight (or
more than one white knight) but only if: (i) a hostile offer (rather than a
possible offer) has already been made; (ii) the white knight is announcing its
firm intention to make a recommended offer; (iii) the aggregate value of the
inducement fee or fees payable is capped at 1% of the value of the offeree
company (calculated by reference to the price of the competing offeror’s offer
(or, if there are two or more competing offerors, the first competing offeror) at
the time of its firm offer announcement); and (iv) the fee is payable only if an
offer made by a party other than the white knight (but including the original
hostile offeror) becomes or is declared wholly unconditional.
See new Rule 21.2 and Note 1 thereon.
Formal sale process: the prohibition on inducement fees does not apply in
the context of a formal sale process (i.e. an auction) initiated by the offeree
company prior to a firm offer announcement. The offeree company may enter
into such an agreement with one offeror who had participated in the process.
See new Note 2 on Rule 21.2.
Financial distress: The Takeover Panel recognises that there may be
certain cases where a company is in such financial distress that it may be
appropriate to allow an inducement fee to be entered into. The Takeover
Panel will need to be consulted in such circumstances.
These restrictions do not apply to inducement fees from offeree company
shareholders.
Other deal protection measures
There is a general ban on offer-related arrangements. This will affect not only
restrictive deal protection mechanisms but agreements or arrangements
which form part of the offer discussions (e.g. where an offeree company
proposes to sell certain assets to the offeror, enter into a licence with an
offeror or an offeror extends finance to the offeree company).
The ban is one-way in that, whilst it restricts the arrangements that can be
entered into by the offeree company and its concert parties, it does not
generally prevent the provision of undertakings by the offeror (which can still,
therefore, provide reverse break fees or agree to a standstill). However, the
Takeover Panel does expressly confirm that the prohibition will apply to an
offeror in the context of a “merger of equals” or reverse takeover where it may
be arguable as to which of the parties should be treated as the offeree
company.
See new Rule 21.2.
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Permitted arrangements
However, an offeree company will continue to be permitted to enter into the
following arrangements with an offeror:
> confidentiality provisions (but not in relation to the identity of the
potential offeror);
> irrevocables and letters of intent;
> non-solicit provisions relating to employees, customers or suppliers;
> information and assistance provisions relating to regulatory clearances;
and
> employee incentive arrangements (e.g. the number of shares to be
issued or the amount payable under a bonus arrangement).
These arrangements must be disclosed and be available on a website by 12
noon on the day after the date of the firm offer announcement.
See new Rule 21.2 and Note 4 thereon.
The Takeover Panel has permitted further exceptions, which include the
following arrangements:
> Management incentivisation arrangements: management
incentivisation arrangements between the offeree company
management and an offeror.
> Regulatory notifications/information undertakings: agreements for an
offeree company to provide an offeror with (i) information or notification
as to the satisfaction of, or its ability to waive, the conditions to an offer;
(ii) confirmation that no material adverse change has occurred in
relation to the offeree company; and (iii) notification of any material
change in the conduct of the offeree company’s business since the
announcement of the offer.
> Ordinary course of business arrangements or agreements: an offeree
company will be permitted to enter into such arrangements with an
offeror if the Takeover Panel is satisfied that such arrangement would
have been entered into, on the same terms, even in the absence of the
offer or possible offer.
Formal sale process
Note that the Takeover Panel, in exceptional circumstances, may allow other
deal protection measures to be entered into in the context of a formal sale
process or, possibly, in financial distress situations (see “inducement (break)
fees above).
See new Note 2 on Rule 21.2.
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Schemes of arrangement
The reforms impact offers implemented by a scheme of arrangement
because of the prohibition of implementation agreements (which provide an
offeror with some degree of control over the scheme process and contain
undertakings from the offeree company to proceed with the scheme on the
agreed timetable).
The Takeover Code is amended to introduce obligations on the offeree
company to implement the scheme in accordance with the agreed timetable.
However, the offeree company’s obligation to implement the scheme in
accordance with the timetable published in the scheme circular will cease to
apply if the offeree company withdraws its recommendation, announces an
adjournment of the shareholder meetings or court sanction hearing, or if such
meetings or hearing are otherwise adjourned. In such a situation, the
Takeover Panel states that it will normally consent to a switch to a contractual
offer and to setting the acceptance condition at the level the offeror chooses
up to 90%. Such Takeover Panel consent would be unlikely in the event of
immaterial delays.
See new Section 3(f) of Appendix 7 and new Note 2 on Section 8 of Appendix
7.
Importantly, in order to enable an offeror to terminate a scheme which the
offeree company no longer wishes to pursue (and can no longer be
contractually bound to pursue under an implementation agreement) the
Takeover Code has been amended to allow an offeror to insert conditions to
an offer effected by scheme as follows:
> a deadline by which the shareholder meetings must be held;
> a deadline by which the court sanction hearing must be held; and
> a long stop date by which the scheme must become effective.
The deadlines set for the shareholder meetings and the court sanction
hearing must be more than 21 days after the dates in the agreed timetable. If
a deadline or the long stop date is not met, such conditions will not be subject
to the materiality test which applies to other offer conditions and the offeror
can lapse the offer.
See new Section 3 of Appendix 7.
Enhanced disclosure of information
Financial information and offer financing
The reforms require greater disclosure by an offeror of financial information
and the information on the financing of an offer including:
> offeror information and offer financing: the financial situation of the
offeror and all offer financing arrangements (including repayment
terms, market flex, interest rates, key covenants as well as disclosure
in broad terms of the various tranches of acquisition debt and equity
financing) must be described in all cases. The previous exemption for
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cash-only offers/schemes of arrangement where no offeree company
shareholders would remain minority shareholders in the offeree
company has been removed. See new Rule 24.3;
> offer financing documents: the offer financing documents must also
be made available for inspection on a website by 12 noon on the
business day following the date of the firm offer announcement (rather
than the publication of the offer document). See new Rule 26.1(b); and
> ratings information: the offer document must contain summary details
of the ratings and “outlooks” provided by rating agencies in respect of
an offeror and an offeree company prior to the start of the offer period.
In addition, it should disclose any changes made to such ratings or
outlooks during the offer period, prior to publication of the offer
document, as well as a summary of the reasons for such changes.
Disclosure should be made irrespective of whether the offer is material
for the offeror. See new Rule 24.2(c).
Other changes are:
> two years of financial information: the current requirement for three
years of financial information is reduced to two. Offer documents will
also not need to include individual items of financial information –
instead a website address must be made available on a website where
the financial information on an offeror and an offeree company can be
incorporated by reference. In the case of an overseas offeror, the
information must normally be available in the English language. See
new Rule 24.3(a)(iii) and Note 2(b) on Rule 24.3; and
> significant change in the offeror’s financial or trading position: the
detail on any known significant change in the financial or trading
position of the offeror (since the end of the last financial period for
which either audited financial information or interim financial
information has been published) need only be included in the case of
securities exchange offers. See new Rule 24.3(a)(v).
Exceptions
Financing “headroom” to revise an offer
Whilst details of the financing for the current offer must be disclosed, a
potential increase in the facility agreed in order to revise the offer will not
normally be required to be disclosed in the offer document. Any financing
headroom detail should be set out in a separate document which does not
contain other provisions.
Private equity financing structures
Recognising the sensitivity for private equity bidders of disclosing the
structures by which equity is provided to private equity offeror vehicles, such
equity structures are not required to be disclosed in detail. It will not be
necessary to disclose the leverage within such funds or the split,
categorisation or identity of the limited partners, general partners or other
underlying participants in the equity financing.
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However, there is no dispensation in respect of the debt arrangements for
private equity offerors notwithstanding the sensitivity for private equity houses
of the arrangements put in place with their lenders.
Disclosure of offer-related fees
The offer document (and any offeree company circular) must contain the
following details of offer-related fees for offeror and offeree company
respectively:
> estimated aggregate fees and expenses: an estimate of the
aggregate fees and expenses expected to be incurred in connection
with the offer;
> advisory fees: the estimated fees and expenses of advisers to each
party to an offer, disclosed separately by category (including the
maximum and minimum amounts payable as a result of any success,
incentive or ratchet mechanisms, whilst respecting certain commercial
sensitivities). This will include the fees of financial advisers, brokers,
accountants, lawyers, PR advisers, management consultants, actuaries
and specialist valuers (e.g. minerals experts, reserve engineers and
chartered surveyors);
> variable and uncapped fees: success fees will continue to be
permitted but, in the case of a variable or uncapped fee arrangement
(including discretionary payments, where the amount depends on the
final value of the offer or where the fee will be calculated on a time cost
basis), estimates of the maximum and minimum amounts payable
should be disclosed. Where a fee may increase (e.g. in a revised offer
or in a competitive bid) the higher amount does not need to be
disclosed unless and until those circumstances arise;
> financing fees: financing fees and expenses must be disclosed
separately from advisory fees. Disclosure must be made on the basis
that the offer will complete and the offer finance will be drawn-down in
full. Commitment fees should be disclosed by providing the principal
amounts of the facilities and the annual percentage rate applicable for
the period between commitment and drawdown. Syndication fees will
also need to be disclosed. Fees or margins payable in connection with
hedging arrangements which relate to an offer are to be treated as
offeror risk management costs and do not need to be disclosed; and
> disclosure of material changes: any material changes to estimated
advisory fees are to be promptly disclosed privately to the Takeover
Panel which will then determine if an announcement is required. This is
likely to be important in the context of fee ratchet mechanisms and
variable fee arrangements affected by hostile or competitive situations.
Also, if the actual final fees and expenses materially exceed the
amount previously disclosed as the estimated maximum, the Takeover
Panel must be told. This will apply even if payment is made after the
end of the offer period. The Takeover Panel has helpfully clarified that a
change of 10% or more to estimated advisory fees is regarded as
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material, although it will take all relevant factors into account in
deciding whether an announcement of the changes is required.
See new Rule 24.16 and new Rule 25.8.
Greater recognition of the interests of offeree company
employees
Enhanced disclosure of future plans
The Takeover Code already required an offeror to disclose details of any
plans regarding the offeree company’s employees, locations of business and
fixed assets. However, partly as a result of events which occurred during the
Kraft bid for Cadbury, the effectiveness of this requirement has been the
subject of much debate.
The key reform is the express codification of a “truth in takeovers”
requirement that any statements of intent or negative statements made by an
offeror or offeree company in an offer document, offeree board circular or
announcement relating to any action it intends to take, or not take, after the
end of the offer period will, in the absence of any stated time period, be
adhered to for a period of at least 12 months after the end of the offer period.
See new Note 3 on Rule 19.1.
The Takeover Panel has, however, confirmed that it would be permissible for
the offeror or offeree company to be released from adhering to their
statement of intent or negative statement if there has been a “material change
in circumstances”. No further gloss is provided on what might constitute a
“material change in circumstances” which will be judged by the Takeover
Panel on a case by case basis.
The Takeover Panel states that it will investigate any complaint from an
interested person of a breach of this requirement. If a breach is found to have
occurred, the Takeover Panel anticipates that disciplinary sanctions would be
imposed.
The Takeover Panel confirms that any statement of intent by an offeror
should be as detailed as possible on the basis of the information known to the
offeror at the time it is made. Statements of a general nature are unlikely to
be acceptable in the context of a recommended offer where there has been
an opportunity to do full due diligence.
Although the above requirements are not related to statements regarding
offeree company employees, it is expected that, following the Cadbury offer,
there will be much greater emphasis on the level of disclosure required in
order to satisfy the disclosure requirement relating to offeree company
employees.
In addition, enhanced disclosure of an offeror’s intentions towards the offeree
company is required as follows:
> inclusion of a new negative statement if the offeror has no plans in
respect of offeree company employees, business locations and fixed
assets. See new Rule 24.2(b); and
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> an offeror will be required to state its intentions with regard to the
maintenance of any existing trading facilities for the offeree company’s
securities (e.g. if the offeree company’s securities are listed, whether
there is an intention to delist them). The Takeover Panel believes this to
be an important factor for shareholders when making a decision on any
offer. See new Rule 24.2(a)(iv).
Views of employee representatives
The Takeover Code is amended to reinforce provisions relating to
engagement with employee representatives and to allow employee
representatives (e.g. trade union representatives) to be more effective in
providing their opinion on the effects of the offer on employment by:
> introducing a requirement for offeree company boards to inform
employee representatives at the start of an offer period of (i) their right
to circulate an opinion on the offer; and (ii) the offeree company’s
responsibility for the reasonable costs of verifying such opinion. See
new Rule 2.12(d);
> confirming that the Takeover Code does not prohibit information being
passed in confidence to employee representatives during an offer
period. See new Note 6 on Rule 20.1;
> confirming that the offeree company board has a responsibility to
publish the employee representative opinion at the offeree company's
expense. If the employee representative opinion is not received in
sufficient time to be appended to the offeree company circular, the
offeree company must publish it on a website and make an
announcement to this effect (and such obligation continues until 14
days after an offer has become or is declared wholly unconditional).
See new Rule 25.9;
> confirming that the employee representative opinion is excluded from
the offeree company board’s responsibility statement. See new Rule
19.2(a)(iii); and
> requiring the offeree company to pay the reasonable costs of verifying
the information contained in the employee representatives opinion. See
new Note 1 on Rule 25.9.
Factors that offeree company boards can take into account in
recommending or opining on offers
The aim of these amendments is to make it clear that the Takeover Code
does not place any limitations on the considerations to which the offeree
company board should have regard. The amendments make it clear that offer
price is not necessarily the determining factor for an offeree company board’s
decision. This is more clarificatory than a change of substance since offeree
company boards have always been free to have regard to all relevant factors.
See new Note 1 on Rule 25.2.
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Miscellaneous amendments
A number of other amendments are also being made to the Takeover Code
as follows:
Firm offer announcement to stop offeror “taking something off the
table”
The Takeover Code now expressly provides that an offeror is not permitted,
after a firm offer announcement (as opposed to a possible offer
announcement), to exercise any right it has reserved to set aside a statement
in relation to the level of consideration it will offer or in relation to varying the
form and/or mix of consideration.
See new Note 1 on Rule 2.5.
Automatic carve-outs in no intention to bid statement
The standard carve-outs allowing an offeror to set aside a no intention to bid
statement need no longer be set out in the no intention to bid statement (i.e.
offeree company board agreement, announcement of a third party firm offer,
a material change in circumstances, a whitewash or a reverse takeover) –
such carve outs will apply automatically.
See new Rule 2.8.
Documents on display
There is no longer a requirement for hard copies of display documents to be
made available for inspection. Instead, the documents must be published on
a website.
In addition to the requirement noted above to put financing documents on
display (see “financial information and offer financing” above), any irrevocable
commitment/letter of intent, indemnity or dealing arrangements and any offer–
related arrangement or agreement permitted under, or excluded from, Rule
21.2 must be available on a website from 12 noon on the business day
following the date of the firm offer announcement. This is a change from the
current requirements for such documents only to be put on display when the
offer document is published. This will mean that documents such as
confidentiality agreements will be required to go on display which was not the
case previously.
See new Rule 26.1.
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Key Questions on the Practical Impact of Takeover Code
Reform
General
1 What about offers which are “live” on 19 September 2011?
Are they impacted?
Yes, if an offer period has already started on that date. For example,
on that date an offeree company that is already in an offer period will
need to identify all potential offerors with whom it is in talks or from
whom it has received an approach. Any unidentified white
knights/potential offerors appearing since the start of the offer period
would however not need to be identified in this process provided their
existence has not been referred to.
If a firm offer announcement has been made prior to 19 September
2011, the subsequent offer document will need to comply the new
enhanced disclosure regime, if published after 19 September.
See Appendix 1 for further detail on the transitional arrangements.
2 Is a pre-conditional offer still possible?
Pre-conditional firm offers (i.e. where the publication of the offer
document is pre-conditional on the satisfaction or waiver of certain
pre-conditions) will continue to be permitted, subject to Takeover
Panel consent. An announcement of a firm pre-conditional offer will
continue to satisfy a PUSU deadline.
This could lead to an increase in pre-conditional offers following the
reforms due to the automatic PUSU deadlines and, in particular, the
timeframe for obtaining material regulatory clearances which could
otherwise be resolved during a virtual bid period.
See new Rule 2.5 and new Note 2 on Rule 2.7.
3 What are the most significant changes to the UK takeover
regime?
A leak announcement by an offeree company at the start of an offer
period will trigger the identification of all potential offerors with whom
it is in talks or from whom it has received an approach (provided such
an approach remains live). An identified potential offeror is then
required to make a firm offer within 28 days or walk away.
The general prohibition on deal protection measures such as break
fees and implementation agreements is also a significant change,
impacting on offerors used to such measures (e.g. US offerors) as
well as private equity offerors.
4 Are private equity offerors being treated differently?
It has been widely reported that private equity offerors will be the
most affected by the new Takeover Code reforms (e.g. as a result of
15
the prohibition of deal protection measures and mandatory
identification in leak announcements) but they are not being treated
differently to other offerors. Private equity offerors are however
receiving one dispensation in respect of disclosure of equity
arrangements.
The structures by which equity is provided to private equity offeror
vehicles are not required to be disclosed in detail (i.e. it will not be
necessary to disclose the leverage within such funds or the split,
categorisation or identity of the limited partners, general partners or
other underlying participants in the equity financing).
There is no dispensation in respect of the disclosure of debt
arrangements for private equity offerors.
Identifying Potential Offerors
5 Can an offeree company avoid identifying a potential offeror
at the start of an offer period?
Generally no.
An offeree company must identify all potential offerors from whom it
has received an approach (provide such an approach remains live) or
with whom it is in talks where it makes an announcement which starts
the offer period. There is an exception if a formal sale process has
been initiated (see Question 13 below) or if all the potential offerors
agree to down tools for 6 months (see Question 6 below).
The Takeover Panel will not allow the offeree company to identify
only the potential offeror whom it believes to be responsible for
leaking the deal since it is often not possible to be definitive on the
source of a leak.
If an offeror starts the offer period by an announcement, there is no
parallel requirement for all other potential offerors to be named.
See new Rule 2.4.
6 How can a potential offeror avoid being identified at the start
of an offer period?
The revised Takeover Code expressly prohibits an offeror from
preventing an offeree company from identifying it.
If the deal remains confidential, there is no need to identify a potential
offeror. Once a leak has occurred, the only way for a potential offeror
to avoid identification at the start of an offer period is by downing
tools (which is subject to Panel consent). This is a commitment to the
Takeover Panel and the offeree company not to make an offer for six
months. This is the same as a public no intention to bid statement
save that this commitment will not need to be announced unless
speculation continues or an announcement is needed to correct a
false market.
16
It may be possible in an approach to an offeree company to treat the
approach as terminated in the event of a leak. The effectiveness of
this should be discussed with the Takeover Panel.
See new Note 4 on Rule 2.2.
7 What options are available to an offeree company in talks
with a white knight?
The options available depend on the timing of the talks.
If the offeree is not in an offer period, it will not be required to
announce that it is in discussions with a white knight unless and until
there is a leak which triggers the requirement for an announcement of
the identification of any potential offeror. This will lead to the white
knight being identified by the offeree company.
See new Rule 2.4 (a).
Once in an offer period, the offeree company is not required to
identify or announce the existence of the white knight unless it so
wishes. See new Rule 2.4(b). This is subject to two caveats:
> if there is rumour or speculation which specifically identifies
the white knight or the offeree company refers to its existence
then an announcement will be required to identify it. See new
Rule 2.4(b) and new Note 4 on Rule 2.2.
> if a firm offer is made by another offeror, and an offeree
company subsequently refers to the existence of a white
knight but does not identify it, then the white knight will be
required, by Day 50 of that offer, to announce a firm offer or
confirm to the offeree company that it will walk away. If the
white knight walks away in this circumstance it will not need
to be identified by the offeree company although the offeree
company will need to announce that the white knight has
walked away. See new Rule 2.6(e).
An offeree company is also able to agree an inducement fee with a
white knight, provided certain conditions are met (see Question 12
below). See new Note 1 on Rule 21.2.
PUSU Deadlines
8 Can an offeree company request a private put up or shut up
deadline in respect of any potential offeror?
No. The possibility of a private PUSU deadline was raised during the
consultation process for the Takeover Code reforms but was not
adopted.
9 Can a 28 day PUSU be extended?
Not unilaterally by an offeror. An offeree company must be involved
in any request to the Takeover Panel for an extension to a PUSU
17
deadline. The deadline extension will only be agreed by the Takeover
Panel towards the end of the PUSU period. The Takeover Panel will
take into account the status and anticipated timetable for completion
of negotiations in deciding whether to extend the PUSU deadline.
A potential offeror cannot also obtain a commitment from an offeree
company to extend a PUSU deadline.
See new Rule 2.6(c).
10 Does a PUSU extension agreed for one potential offeror apply
to other potential offerors?
No. The revised Takeover Code expressly allows the offeree
company to request different deadline extensions for different
potential offerors or to extend the deadline for any one of a number of
potential offerors.
See new Note 1 on Rule 2.6.
11 If an offeror makes an announcement which starts an offer
period will this require all other potential offerors to be
identified and be subject to the automatic PUSU deadline?
No. A basic rule of thumb is that an offer announcement (possible or
firm) by an offeror will not trigger an announcement by the offeree
company of the identity of other potential offerors.
Deal Protection
12 What is the state of play on inducement fees in Takeover
Code offers?
Limited Circumstances
There are now only three situations in which inducement fees can be
agreed by an offeree company - a formal sale process initiated by the
offeree company, with white knight bidders, and in cases of severe
financial distress.
Limited Triggers
The triggers for payment of an inducement fee are also severely
restricted. In a formal sale process, the offeree company can agree
an inducement fee with one offeror (who had participated in the sale
process) at the time of its firm offer announcement. This inducement
fee is only payable if another offer becomes/is declared wholly
unconditional.
In the case of any white knight offerors, the offeree company, when in
receipt of a hostile firm offer, is able to agree inducement fees with
more than one white knight at the time of its firm offer announcement.
Again, the trigger for payment in this circumstance is only if another
offer becomes/is declared wholly unconditional.
18
The Takeover Code does not go into any detail as to the
circumstances of such a fee being agreed in a case of financial
distress.
Amount of Inducement Fee
In all cases, the maximum amount payable in inducement fees is no
more than 1% of the value of the offeree company. If there is a
competing offer, this is calculated against the offer price of the
competing offer. If there is more than one competing offer, the 1%
value is calculated against the first competing offer.
In addition, an inducement fee cannot be stated to be exclusive, or
impose other restrictions on the offeree beyond what is permitted
under the Takeover Code.
These restrictions do not apply to inducement fees from offeree
company shareholders.
See new Rule 21.2.
13 A formal sale process is an important exemption - what is a
formal sale process?
A formal sale process removes the need for (i) all potential offerors to
be identified at the start of an offer period by an offeree company and
(ii) an automatic 28 day PUSU deadline to apply. It is also one of the
limited circumstances in which an offeree company can agree an
inducement fee (see Question 12 above).
Deal protection measures (other than inducement fees) can also be
agreed in the context of a formal sale process but only in “exceptional
circumstances”. The Takeover Code gives no further detail on this.
A formal sale process is not defined in the Takeover Code. It is a
process by which an offeree company announces, prior to receiving a
firm offer, that it is seeking one or more potential offerors by means of
a formal sale process. Importantly, the Takeover Panel has stated
that it does not consider it to include the announcement by an offeree
company of a strategic review of its business (e.g. where the sale of
the offeree company is one of the options under consideration). Other
detail as to what constitutes a formal sale process will be decided by
the Takeover Panel flexibly on a case by case basis. This is likely to
involve detailed consultation with the Takeover Panel.
The availability of this exemption and the conditions the Takeover
Panel will impose are likely to evolve over time.
See new Note 2 on Rule 2.6 and new Note 2 on Rule 21.2.
14 With implementation agreements now banned, what
undertakings can an offeror and offeree company agree
between themselves?
19
The offeree company may enter into the following limited set of
undertakings with an offeror:
> confidentiality provisions (but not in relation to the identity of
the offeror)
> irrevocables and letters of intent
> employee benefit arrangements (e.g. the number of shares to
be issued or the amount payable under a bonus
arrangement)
> information and assistance provisions relating to regulatory
clearances
> non-solicitation of customers, suppliers or employees
Management incentivisation arrangements also continue to be
permitted. The Takeover Panel will also permit the offeree company
to make notifications to the offeror as to the satisfaction of offer
conditions, material adverse change and material change in the
business. Ordinary course of business arrangements between offeror
and offeree company will also be permitted.
Other previously commonly-used undertakings such as exclusivity,
no solicitation, no provision of information and matching rights cannot
be entered into by an offeree company. Provisions relating to timing
and implementation of a scheme of arrangement are also prohibited.
An offeree company cannot also enter into a break fee, except in very
limited circumstances (see Question 12 above). In addition, an
offeree company cannot agree to seek an extension to a PUSU
deadline for a potential offeror.
Given these restrictions, there will be increased emphasis on
irrevocable undertakings as well as stakebuilding by offerors to
achieve some form of deal protection.
An offeror is not generally restricted in the undertakings into which it
can enter and so can agree to, for example, a reverse break fee. This
is because the Takeover Panel does not believe that offeror
undertakings would deter competing offerors from making an offer or
lead to competing offerors making an offer on less favourable terms
than they would otherwise have done. However, the offeror will be so
restricted in the case of a reverse takeover or merger of equals
where it is arguable as to which party is the offeree company.
See new Rule 21.2.
15 With implementation agreements banned, what control does
an offeror have over a scheme of arrangement?
An implementation agreement was a means by which an offeror
could have a degree of control over the process and timing of a
scheme of arrangement. The new reforms prohibit implementation
20
agreements, relying instead on obligations in the revised Takeover
Code on offerors to implement a scheme in accordance with the
agreed timetable.
However, the offeree company’s obligation to implement the scheme
in accordance with the timetable published in the scheme circular will
cease to apply if the offeree company withdraws its recommendation,
announces an adjournment of the shareholder meetings or court
sanction hearing, or if such meetings or hearing are otherwise
adjourned. In such a situation, the Takeover Panel states that it will
normally consent to a switch to a contractual offer and to setting the
acceptance condition at a level the offeror chooses up to 90%. Such
Takeover Panel consent would be unlikely in the event of immaterial
delays.
See new Section 3(f) of Appendix 7 and new Note 2 on Section 8 of
Appendix 7.
The offeror may also include conditions to an offer effected by
scheme which, if not met, will allow the offer to lapse. These
conditions are:
> a deadline by which the shareholder meetings must be held
> a deadline by which the court sanction hearing must be held
> a long stop date by which the scheme must become effective
We would expect most offerors to include such conditions in any offer
effected by scheme of arrangement, although agreement of the
offeree company will be required for any extension to the deadlines.
See new Section 3 of Appendix 7.
Financing
16 What is the likely impact of the Takeover Code reforms on
offer financing?
If a potential offeror is willing to go hostile, it will need to be more
prepared before making an initial approach, including having
financing negotiations at an advanced stage prior to such an
approach (within the constraints of the secrecy obligations and the
so-called “Rule of Six” in the Takeover Code). This is because of the
risk that a leak forces a 28 day PUSU deadline, leaving a limited
period to finalise financing for the offer.
The new 28 day PUSU deadline and prohibited deal protection
measures will mean that the offeror may be required to announce on
the basis of less or even no due diligence. Lenders might therefore
be asked to commit funding at an earlier stage, on shorter notice and
on the basis of less due diligence. The reduced opportunity for
offerors to encourage offeree company boards to recommend a bid
21
also increases the likelihood of lenders being asked to finance a
potentially hostile bid.
The new rules on deal protection arrangements may particularly
impact on leveraged acquisition financing– a private equity offeror
might be less willing to engage without a break fee and other deal
protection arrangements and there will be less time and information
available for it to assess and negotiate a deal as well as raising the
necessary financing.
17 What disclosure will be required for financing arrangements?
The Takeover Code reforms require expanded disclosure of financing
arrangements. These reforms are underpinned by a change in the
Takeover Panel’s traditional view that information on offer financing
was only relevant if the consideration was shares. The Takeover
Panel now considers that a broader range of parties are interested in
that information, including employees. Financing arrangements must
therefore now be disclosed, irrespective of the type of offer;
previously, such arrangements did not require disclosure if the offer
was cash-only or by way of scheme of arrangement where no offeree
company shareholders would remain minority shareholders in the
offeror.
Details which must be disclosed include repayment terms, interest
rates, market flex, key covenants as well as disclosure in broad terms
of the various tranches of acquisition debt and equity financing.
See new Rule 24.3(f).
Documents relating to the financing must also be made available for
inspection on a website at an earlier stage in the offer process – by
12 noon on the business day following the date of the firm offer
announcement, instead of from the publication date of the offer
document under the previous rules.
See new Rule 26.1(b).
The Takeover Panel is not contemplating allowing redaction of
“commercial sensitivities” in the financing documents but it has
preserved the position that it will not require disclosure of a potential
increase in the facility that has been agreed in order to allow for a
higher offer.
Disclosure of Offer-Related Fees and Expenses
18 Is there any dispensation for disclosure of offer-related fees
and expenses in offer documents by offerors or offeree
companies?
No. To the extent any of the fees or expenses relate to work outside
the offer e.g. reorganisation or IPO work, then the Takeover Panel
should be consulted as to whether these fees can be excluded from
disclosure.
22
Where fee(s) may increase due to any success, incentive or ratchet
mechanisms the higher amount need not be disclosed until the
circumstances arise. The Takeover Panel will need to be consulted if
disclosure of such success fees might prejudice offeree company
shareholders e.g. where the offer remains hostile and disclosure of
the ratchet mechanism could reveal the defence strategy.
See new Rule 24.16 and Rule 25.8.
Employee Representatives
19 What are the new obligations for offeree companies with
respect to employee representatives?
Whilst the obligations are new, they do not change the basic tenet of
the previous rules relating to employee representatives. There are
essentially three new requirements with which offeree companies will
need to comply:
> an offeree company board must inform employee
representatives at the start of an offer period of their right to
circulate an opinion on the offer. See new Rule 2.12(d)
> if the employee representative opinion is not received in
sufficient time to be appended to the offeree company
circular, the offeree company must publish it on a website
and make an announcement to this effect (up to 14 days after
the offer has become or is declared wholly unconditional).
See new Rule 25.9
> an offeree company must pay the reasonable costs of
verifying the information contained in the employee
representative opinion. See new Note 1 on Rule 25.9
Given that employee representatives includes trade union
representatives, it may be the case that an offer may attract more
than one such opinion if there are a number of trade unions
representing the employee workforce.
Statements of Intent
20 Can a statement of intent or no action made by an offeror or
offeree company apply for a period shorter than 12 months?
A key takeover reform is the express codification of a “truth in
takeovers” requirement that any statements of intent or negative
statements made by an offeror or offeree company in an offer
document or announcement relating to any action it intends to take,
or not take (e.g. in relation to the offeree company’s future business),
after the end of the offer period will, in the absence of any stated time
period, be adhered to for a period of at least 12 months after the end
of the offer period.
23
The Takeover Code already required an offeror to disclose details of
any plans regarding the offeree company’s employees, locations of
business and fixed assets. However, partly as a result of events
which occurred during the Kraft offer for Cadbury, the effectiveness of
this requirement was the subject of much debate. As a result, we
expect the impact of this reform to be fuller disclosure and focus
around such statements of intent.
In theory, such a statement could specify a period shorter than 12
months. However, if such a statement of intention is specified to
apply for a very short period, this will tell its own story and inevitably
lead to questions. Any deviation from such statements, once made,
will only be permitted if there is a “material change in circumstances”,
otherwise the Takeover Panel will impose disciplinary sanctions.
This new requirement may lead to such statements being subject to
certain qualifications, but the Takeover Panel will regard this as
preferable to a general, but unqualified statement.
Although the above requirements are not related to statements
regarding offeree company employees, it is expected that, following
the Cadbury offer, there will be much greater emphasis on the level
of disclosure required in order to satisfy the disclosure requirement
relating to offeree company employees.
See new Note 3 on Rule 19.1.
24
Appendix 1: Transitional Arrangements
For offers which are already “live” on 19 September 2011, transitional
arrangements (available here) will apply as follows:
Identification of potential offerors
Where an offer period has begun and no firm offer has yet been made, an
offeree must, by 5.00pm on 19 September 2011, announce the identity of any
potential offeror with whom it is in talks or from whom it has received an
approach at the start of the offer period and with whom it continues to be in
the same position on 19 September 2011. This will also extend to any other
potential offerors whose existence had been referred to in any announcement
made since the start of the offer period. The announcement by the offeree
company must also include the automatic PUSU deadlines imposed on such
potential offerors (see below).
Any unidentified white knights/potential offerors appearing since the start of
the offer period would however not need to be identified in this process
provided their existence has not been referred to.
This identification process will not apply if the offeree company is in receipt of
a firm offer prior to 19 September 2011. It will also not apply where the offer
period has started as a result of an announcement by a potential offeror prior
to 19 September 2011.
PUSU deadlines for identified potential offerors
Any potential offeror identified in an announcement on or before 19
September 2011 will be required, by 5.00 pm on 17 October 2011, to
announce a firm offer or state no intention to bid, subject to Takeover Panel
consent to an extension of the deadline. This will not apply if another offeror
has either already made a firm offer prior to 19 September 2011 or makes
one prior to the 17 October deadline.
Employee representative opinion
Any employee representative opinion received on or after 19 September
2011, but not in time to be appended to the offeree company board circular,
must be published in accordance with the new regime, i.e. the offeree
company must publish the opinion on a website and also pay the reasonable
costs of its verification. This applies even if the related offer document or
offeree company circular was published prior to 19 September 2011.
Contents of offer document
If an offer document is published prior to 19 September 2011, any documents
(e.g. the offeree company board circular and any revised offer document)
relating to that offer published after 19 September 2011 do not need to
comply with the new regime dealing with the contents of such documents
(e.g. enhanced disclosure of financial information and financing
arrangements, and disclosure of advisers’ fees).
25
This could result in competing offerors operating under different disclosure
requirements in their offer documents depending on the date of publication.
Schemes of arrangement
Firm offers announced prior to 19 September 2011 which are being
implemented by scheme of arrangement will be subject to the existing regime
under Appendix 7 of the Code, even if the scheme circular is published after
19 September 2011. This means that such an offer will not have the ability to
include timetable deadlines as conditions (although an implementation
agreement containing similar contractual undertakings may be in place, if
agreed before 19 September 2011). The scheme circular will however need
to comply with the enhanced disclosure regime (e.g. on financial information
and advisers’ fees).
Inducement fees and other offer-related arrangements
The prohibition on inducement fees and other offer-related arrangements will
apply from 19 September 2011. Any such arrangements entered into prior to
midnight on 18 September 2011 will not be subject to the new regime.
Display Documents
In respect of firm offers announced prior to 19 September 2011, the new
requirement as to earlier display of key documents (e.g. financing
arrangements and break fee agreements) will not apply. Such documents will
need to be available for inspection at the time of publication of the offer
document.
The Takeover Panel may be prepared to derogate from the transitional
arrangements in certain circumstances where to adhere to them would be
unnecessarily restrictive or inappropriate.
26
Author: Joanna Healey
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