• A Shift in the Balance of Power: An Analysis of the UK Takeover Code Changes Six Months On
  • March 15, 2012 | Authors: Damian Connolly; Theo Godfrey; Andrew Overend
  • Law Firm: Edwards Wildman Palmer - London Office
  • Recent changes to the UK Takeover Code (the Code) have markedly shifted the balance of power from bidders to target boards in any takeover subject to the Code. As a result, bidders will need to carefully consider their deal strategy from day one.

    The changes follow the UK Takeover Panel’s (the Panel) review of the Code in the wake of the hostile takeover of Cadbury by Kraft in 2010. In that takeover there were allegations that the drawn-out bid process had a destabilizing effect on Cadbury and there was criticism regarding the fact that Kraft did not deliver on its stated belief that a UK manufacturing plant would not be closed.

    The changes to the Code came into force on 19 September 2011 and include a new “put up or shut up deadline”, a ban on “offer-related arrangements”, such as break fees, and increased disclosure requirements. Broadly, the Code applies to all offers for companies which have their registered offices in the UK and have securities admitted to trading on a regulated market in the UK (which includes the LSE’s main market and AIM).

    “PUT UP OR SHUT UP” DEADLINE

    Any potential bidder identified as such in an announcement will, unless the Panel has consented to an extension, now have 28 days to either (i) announce a firm intention to make an offer (known as a “Rule 2.7 Announcement”) or (ii) announce that it will not make an offer. This is often referred to as a “put up or shut up” or “PUSU” deadline.

    The Code stipulates that the Panel will “normally consent to an extension” of a PUSU deadline if requested to do so by the target board and after taking into account all relevant factors including the status of negotiations between the target and the potential bidder. The support of the target board for any proposed extension may be influential in whether the Panel grants consent.

    Bidders should therefore be extremely careful to try and avoid information leaks during the negotiation process with any target that might require the target board to announce a potential approach and trigger the start of the 28 day PUSU period. If an extension is not granted (which may be considered likely if the target board does not support the deal and therefore does not support such an extension request) and, as a result, the bidder is forced to announce that it will not make an offer, then the bidder will usually be prohibited from making an offer for a minimum period of 6 months.

    BAN ON OFFER-RELATED ARRANGEMENTS

    A general ban on bidder deal protection measures and inducement fees has been introduced under the Code changes, which extends to any “offer related arrangement” between any target and the bidder in connection with an offer. The Code defines “offer-related arrangements” very broadly and this term will catch implementation agreements (which were the standard con-tractual protection sought by bidders seeking to ensure ‘deal-certainty’ pre-Code changes), exclusivity agreements and, in particular, break fee agreements.

    Any potential bidder considering a takeover will need to be aware that it no longer has any contractual recourse (under an implementation agreement) if the target breaches any deal conditions set out in an offer document. Furthermore, bidders should be aware that the Panel will only consider allowing a bidder to walk away from a deal after publication of an offer document by the target if there has been a material breach of any deal condition by the target. The question of what constitutes a “material” breach is entirely in the discretion of the Panel but indications from the Panel are that the threshold is likely to be very high. For example, in 2001 the Panel refused to allow WPP to invoke a material adverse change condition in relation to its offer for Tempus, which WPP claimed had been triggered as a result of the economic effects of the terrorist attacks in the United States on 11 September of that year.

    REQUIREMENT TO PUBLISH ANY DOCUMENTS RELATING TO FINANCING OF THE OFFER AND MATERIAL CONTRACTS DESCRIBED IN THE OFFER DOCUMENT

    The new Code stipulates that, except with the consent of the Panel, documents relating to the financing of the offer need to be published on the target’s website from the date of the Rule 2.7 Announcement.

    Our experience suggests that this will not extend to requiring publication of details of the general financing arrangements of the bidder group, but any bidder should be mindful given the broad wording of the Code provisions.

    In addition, except with the consent of the Panel, any “material contract” entered into by an offeror in connection with the offer that is described in an offer document under Rule 24.3(a) of the Code also needs to be published on the target’s website. Given that this Rule includes a requirement to include a “summary of the principal contents of each material contract”, discussions with the Panel will be required to confirm the extent to which material contracts or a summary of their terms are required to be disclosed. Again, the Panel has wide discretion on these matters to determine what is appropriate in its view.

    REQUIREMENT TO STATE INTENTIONS REGARDING TARGET EMPLOYEES

    The new Code requires bidders to make a negative statement in any offer document if they do not plan to make any changes in relation to the continued employment of the target employees and management. If a bidder makes a statement in an offer document relating to any course of action that it intends to take (or not take) after completion of a takeover, it will be regarded as having committed to it for a minimum period of 12 months from completion. If the Panel thereafter receives a complaint from an interested party that any such statement has been breached, the bidder may be subject to disciplinary sanctions under the terms of the Code (including a public statement of censure by the Panel and referral to the UK Financial Services Authority, which may take its own disciplinary action, including levying a fine). Bidders will need to carefully consider and negotiate with the Panel (if deemed appropriate) to ensure that any statement accurately reflects their intentions.

    Overall, it is clear that target boards have greater power in a bid situation following implementation of the new Code changes. Bidders will need to approach their deal strategy with care and potentially protracted negotiations with the Panel may be required for cautious bidders who wish to abide by the new Code changes whilst keeping information they consider to be confidential out of the public domain.

    From a different perspective, however, it is clear that for many small to mid-cap listed companies (particularly on AIM, where many companies have experienced share liquidity issues and near stagnation in the aftermath of the credit crunch), the new Code perhaps represents an opportunity to consider takeover approaches, which may give them the opportunity to flourish either as part of a larger listed buyer group or by returning the company to the private company arena.