Changes to the Takeover Code: Shifting the Balance of Power

As of today, the Takeover Code has fundamentally changed. Since the Kraft/Cadbury takeover last year, the Takeover Panel has been consulting on significant changes with a view to giving more bargaining power to the target in the early stages of a bid. The changes, which the Panel proposes to review again in a year, are likely to have a significant impact on how takeover offers are conducted.

1. Inducement fees and implementation agreements prohibited

Bidders have often pushed some of the costs of an abortive takeover onto the target by the use of inducement fees and also sought to minimise transaction risk by using matching rights and implementation agreements. With only very limited exception, these measures and others are now prohibited out of concern that they deter or unfairly prejudice competing offers. As bidders now face higher costs and riskier deals, they may start placing more importance on stake-building and collecting irrevocable undertakings. Increased stake-building may in turn mean fewer bids are structured as schemes of arrangement given that shares held by a bidder cannot be voted in support of a scheme. However, for those offers which are still structured as a scheme, the degree of control traditionally afforded by implementation agreements to ensure that the target implements the scheme, is to some extent now imported into the Code. The Code obliges the target to comply with a scheme timetable agreed with the Panel and implement the scheme accordingly.

2. Disclosure of potential bidders' identity

The days of stalking a target company and making cat and mouse overtures to the board whilst remaining anonymous are probably over. Now any person with whom the target is in talks or from whom an approach has been received (and not unequivocally rejected) must be identified in the first announcement made by the target that commences an offer period. Although in many cases a target might not wish to put itself into 'play' by making a voluntary 'in-talks' announcement, the target may nonetheless decide to do so and name its potential bidders in the process. Similarly, a target may have no choice. It may be required to put out an 'in-talks' announcement to address rumours in the market and that announcement will now have to name the potential bidders.

Target companies may also be more willing to make the announcement because it will now trigger an automatic 28 day 'Put up or Shut up' (PUSU) deadline (previously the target had to apply to the Panel to set a deadline). By the PUSU deadline the potential bidders identified in the announcement will either have to announce their firm offer or get the target to request an extension from the Panel; failing which the potential bidder will face being locked out from making further approaches for six months. The target can also choose which bidders to request an extension for (if any) and the periods of each extension can differ.

Bidders now need to assume that from soon after approaching the target board they may only have 28 days to make an offer or at least to convince the target to request an extension. Prudent bidders will therefore want to ensure there are no leaks (which would force an announcement) and will need to have completed more of their bid preparations before approaching the board than was previously the case, including as regards arranging financing. Private equity bidders, in particular, with complex equity funding arrangements will find this new timetable challenging.

3. Disclosure of advisers' fees and expenses

An estimate of the aggregate fees for all advisers to both bidder and target must now be disclosed and broken down between the different categories of adviser. The bidder must also include the fees and expenses relating to its financing arrangements. With this level of disclosure, boards may find themselves fielding potentially hostile questions on the necessity of costs incurred.

4. Disclosure of financial information on a cash bidder

As is already the case for a share-for-share bidder, a cash bidder will now also have to disclose the same information about its own financial position as the target (e.g. 2 years' accounts etc). Furthermore, summaries of rating agency outlooks will for the first time need to be disclosed. The Panel considers financial information on the bidder necessary in order for the target board and shareholders to assess the impact of the takeover on the future of the company. However, it will also act to increase the accountancy fees associated with otherwise 'vanilla' cash offers.

5. Disclosure of cash bidder financing arrangements

As is already the case for a share-for-share bidder, a cash bidder will now also have to disclose details of its financing and security arrangements. The related financing documents will need to be published on a website without redaction from the date of the firm offer announcement (as opposed to the later date of posting the offer document as was the case previously). The aim of these changes is to assist the target and its shareholders with the analysis of the post takeover balance sheet of the combined group. However, the privacy previously enjoyed by cash bidders regarding their own affairs is now largely lost.

6. Bidders to comply with statements of intention

The Code has long required bidders to state their intentions regarding employees and the future of the business. However, in the Kraft/Cadbury takeover, even though this Rule was complied with, it was argued by Kraft that its intentions regarding the closure of a key factory later legitimately changed once it had acquired the company and had access to more detailed information on the subject.

Addressing this point head on, the amended Code now requires an bidder to be bound to comply with their statements of intention regarding the target for 12 months or such other period of time as may be mentioned unless, in either case, there is a material change of circumstances. The Panel notes that there may be some dispensation for a hostile bidder who has not been able to undertake full due diligence, but as most bids are recommended most bidders will need to undertake a more detailed sensitivity analysis of their assumptions for the post acquisition period and will need to carefully consider including qualifications and timelines to any statements of intention. As breach of this rule could lead to disciplinary action by the Panel, bidders should anticipate the possibility that disgruntled staff of the target or other interested parties may make submissions to the Panel about non-compliance.

7. Employees to be informed earlier about their right to circulate an opinion

Employee representatives must be informed about an offer, and also about their right to include in the target circular a statement of opinion on the offer's effect on employment. This information must now be given at the start of the offer period as opposed to the later time of the firm offer announcement as was previously the case. In practice, this means that a target will need to start employee liaison far sooner.

8. Changes not made

The original Panel consultation, in the wake of the Kraft/Cadbury takeover, consulted on a much wider set of possible changes. Proposals that did not survive through to the end included: imposing a public interest test on bids, raising the success threshold to 60% from 50%, disenfranchising shares acquired during an offer period and requiring all offers to be subject to shareholder approval.

9. Transitional arrangements

In respect of offer periods underway today, the targets have until 5pm to announce the identity of any potential bidders with whom they have been in talks from the start of the offer period and are still in talks (or from whom they have been and still are in receipt of an approach). The 28 day PUSU deadline referred to at Disclosure of potential bidders' identity above is also calculated from today.

If you would like to discuss any of these provisions please speak with your usual contact at Mishcon or get in touch with Ross Bryson.