Executive summary:

• A revised edition of the UK Takeover Code took effect on 19 September 2011.
• The revisions were prompted by Kraft’s hostile takeover of Cadbury in 2010, which triggered debate about the weak position of UK target companies.
• The revised Code introduces rules to strengthen the target’s position, namely an enforced “put up or shut up” regime, early identification of potential bidders and a general prohibition on offer-related agreements.
• The revisions provide for greater recognition of employee interests and aim to increase disclosure about financial information, regarding offer-related fees and offeror financing.
• Transitional arrangements apply to offers which were in process on 19 September 2011.

Revision of UK takeover law

Significant reforms to the regulation of takeovers in the UK were implemented on 19 September 2011, with a new edition of the Takeover Code (the “Code”) (the principal rulebook for takeovers in the UK) taking effect. The revised Code is the product of months of public consultation. The review took place in the aftermath of Kraft Food Inc.’s hostile takeover of Cadbury plc, which sparked debate in 2010 about the weak position of UK targets.

The reforms aim to improve the offer process, provide target companies with greater armoury when faced with a hostile approach, and take more account of the position of people who are affected by takeovers. The reforms apply to all offers and possible offers. Transitional arrangements apply to offer situations which were live on 19 September 2011.

This post summarises the most significant reforms implemented by the revised Code.

1.  Protection for target companies against protracted “virtual bid” periods

The revised Code modifies the “put up or shut up” regime to protect targets against protracted “virtual bids” and incentivise offerors to ensure secrecy during the initial stages of a takeover.

In the past, a target company could ask the Takeover Panel (the “Panel”) to make a “put up or shut up” ruling, which would require the bidder to announce, within a specified time, a firm intention to make an offer or announce that it would not be making an offer. It was up to the target to instigate this process.

The revised Code introduces the following rules:

(i)              Announce the identity of potential bidders

Following an approach to the target, a potential bidder must be named in any announcement made by the target which starts an offer period. If a target has been approached by several potential bidders and is required to make an announcement, it must identify all potential bidders. Once an offer period has started, the Panel will not require target companies to announce the existence of new potential bidders, unless such bidder is subsequently identified in rumour or speculation.

(ii)            28 day “put up or shut up” deadline

A publicly named offeror must, within 28 days of being publicly named, announce a firm intention to make a bid; announce that it will not make a bid; or, jointly with the target, apply to the Panel for an extension of the 28 day deadline. This deadline is automatic; the target no longer needs to request a deadline from the Panel. There may therefore be different deadlines for different bidders, although in practice the Panel anticipates that targets will request a common deadline for all. The Panel has stated that deadline extensions will only be granted shortly before the expiry of the 28 day period, meaning that parties cannot agree at the outset to have a longer negotiation period.

There is a limited exception to the requirements at (i) and (ii) above where the target has put itself up for sale by public auction.

If there is rumour or speculation about a potential offeror such that an announcement would normally be required, a potential offeror can, if the Panel and target agree, avoid being identified in a public announcement by ceasing all active consideration of the offer for a period of time.

2. Prohibition on offer-related agreements

The revised Code implements a general prohibition against offer-related agreements. This prohibition, which was introduced in response to the concern that deal protection packages deter competing offerors and competitive bids, covers traditional protection measures such as inducement or break fees as well as “matching rights”, “no shop” provisions, “no talk” provisions, and any other arrangements entered into as part of offer discussions, such as a related asset sale.

Offeree companies will be able to give certain limited undertakings, namely (i) confidentiality; (ii) non-solicitation of a bidder’s employees, customers or suppliers; (iii) the provision of information or assistance for the purposes of satisfying bid conditions or obtaining regulatory approvals; and (iv) limited irrevocable undertakings from members of the target board.

There will be limited exceptions to the general prohibition. The Panel may grant dispensations regarding white knights (an alternative bidder which may be sought out by a target threatened with an unwelcome bid and which the target board would recommend); takeovers conducted by public auction; or in circumstances where the target is in financial distress and is actively seeking a bid. Where dispensations are allowed, the break fees will be limited to one per cent. of the offer value.

In the case of takeovers conducted by schemes of arrangement, implementation agreements are no longer permitted. Instead, the parties now have to agree a scheme timetable before announcement. The revised Code permits the parties to include within the scheme conditions a long-stop date by which time the scheme must become effective, and specific dates by which the shareholder meetings and court sanction hearing must be held (in each case, unless extended by agreement of the parties).

3. Greater recognition of employee interests

The revised Code improves the quality of disclosure regarding the bidder’s intentions for the target and its employees.

Where an offeror or offeree board makes a statement during an offer period which relates to its strategic plans for the employees of either party, it will be held to such statement for 12 months (or such other period as may be specified in the statement), failing which it may face disciplinary action by the Panel.

The offeror and offeree must notify their employees about the offer at the start of the offer period (i.e. when a possible offer announcement is made). Employee representatives now enjoy greater access to information and may publish their opinion on the offer with the board circular at the company’s expense.

4. Factors which target boards consider when deciding on a bid

The revised Code clarifies that there is no limit on the factors which target boards should consider when deciding whether to recommend a bid.

5. Increased transparency about financial information

Details about offer-related fees, such as advisers fees (e.g. brokers, accountants, lawyers) and financial fees (e.g. draw-down fees, commitment fees) now need to be disclosed.

All offerors must disclose the same level of financial information about themselves in their offer documentation (previously a cash offeror could provide less information). Offerors must also allow their financial documents to go on display in unredacted form from the time of the announcement of the firm intention to make an offer or, if later, from the date of the document. However, offerors are not required to disclose details of any headroom which exists in their financing arrangements which would allow them to revise their offer.

Conclusion

The reforms to takeover law aim to strengthen the position of UK target companies in bid situations. Bidder’s will face additional challenges, having to ensure confidentiality pre-announcement, organise funding and regulatory arrangements swiftly, adapt to the reduction in deal protection measures and follow through on statements of intent.

The Panel proposes to review how the new rules have worked in practice 12 months after the implementation of the revised Code, depending on the level of bid activity in that period.