This article was written for and first featured in Mining Journal
Prompted by the substantial public commentary during US-based Kraft Foods’ hostile bid for UK confectioner Cadbury earlier this year, the UK’s Takeover Panel recently published its response statement to its consultation paper reviewing the regulation of UK takeover bids.
The review was designed to reduce the perceived tactical advantage the operation of the takeover code provides to hostile bidders and redress the balance in favour of the target company.
If implemented, the proposals could change the landscape in which takeovers of London-listed mining companies are conducted.
From a target company’s point of view, many of the proposals contained in the response are very welcome, among them are:
- Proposed changes to the ‘put-up or shut-up’ regime;
- A general prohibition on ‘break fees’;
- Public disclosure of all advisory costs of both parties;
- Increased disclosure of the bidder’s financial information and its financing arrangements; and
- Increased disclosure of the bidder’s intentions in respect of the target and its employees
Perhaps most helpful for London-listed companies subject to a potential bid is that, under the proposals, bidders will be required to be named in announcements following an approach no matter which party makes the announcement.
The bidder will then have a fixed period of four weeks in which to ‘put up or shut up’, that is, to either make a firm offer announcement or announce that it does not intend to make an offer.
Contrast this period with the almost four months that elapsed between the announcement last year of Xstrata plc’s approach to merge with Anglo American plc and its confirmation that it would not be making an offer in response to a ‘put up or shut up’ order from the panel.
By requiring the identity of the bidder to be made public, and accelerating the bid timetable, the often lengthy periods where companies find themselves under siege by potential bidders would be significantly reduced.
The panel’s review also considers how to address the often decisive pressure that undue influence by hedge funds and arbitrageurs (which acquire their shares during the course of a bid) can have on the ultimate success or failure of the bid.
In the event however, the panel expressly chose not to recommend any measures in this regard.
Such a measure may have included increasing the success threshold to beyond 50% plus one, revoking or restricting voting rights attaching to shares acquired during the offer period, reducing the share interest disclosure threshold to 0.5% from the current 1%, or requiring bidder shareholder approval.
The panel’s rationale for this approach was that in many cases such changes are more appropriately made within UK company law rather than in the code.
For example, as the threshold to pass ordinary resolutions (and thereby be in a position to remove a company’s board of directors) is currently 50% plus one, any increase to the success threshold of a takeover could leave a situation where the takeover could fail but the board’s position would be untenable.
This approach reinforces the unfortunate reality that the panel, no matter how comprehensive or well-intentioned, cannot address all of the prevailing concerns that have been raised in the wake of Kraft-Cadbury on its own.
Moreover, there are a number of issues that were not addressed at all within the panel’s proposals which should be considered as part of any wider review.
There currently exists a mismatch between the code and UK company law on the threshold shareholding for parties acting in concert to effectively ‘control’ a London-listed company.
Rule 9 of the code currently requires a mandatory bid to be made (or shareholder approval to be obtained) where parties acting in concert acquire 30% or more of a target company.
However, under company-law, special resolutions can be blocked, and arguably negative control asserted, with a holding of 25% (and in practice, even less than this as not all shareholders will actually vote on any given resolution).
Therefore a single shareholder can frustrate a business plan or course of action which has been approved by a significant majority of shareholders by voting down special resolutions regarding such things as dividends, share repurchases, share issuances, reductions or reclassification of capital, creating gridlock without having to make an offer for the rest of the company.
Other jurisdictions such as Australia and Canada have a 20% stake-building limit in place and the UK should also consider whether there is any merit in aligning the current mandatory bid threshold with the 25% special resolution blocking stake or lower.
Another issue relates specifically to mining companies listed on the AIM market.
The code (either in its current form or as proposed to be revised) does not apply to a significant number of AIM companies at all.
It is often overlooked that, unlike the Main Market where the code applies to all listed companies regardless of where they are incorporated, the code generally only applies to AIM companies which are both incorporated in, and have their central management within, the UK, the Channel Islands or the Isle of Man.
This means that not only the multitude of overseas companies on AIM are outside the jurisdiction of the code, but also an increasing number of UK plcs whose management is located abroad.
Lucara Diamond Corp’s takeover of AIM-listed African Diamonds plc is a recent example of this issue.
Some consideration should therefore be given by AIM, together with the panel, as to whether it would be beneficial to AIM companies and the integrity of the AIM market for the code, or at least certain aspects of it, to apply to all AIM companies.
Whatever the outcome of the panel’s review, it is clear that there needs to be a more coordinated response taking into account appropriate changes to company law, as well as the listing rules and AIM Rules themselves in order to achieve the most effective regulatory takeover regime for mining companies listed in London.
That said, as illustrated by the Canadian government’s recent refusal to allow BHP Billiton’s bid for Potash Corporation of Saskatchewan to proceed, no matter what takeover regime applies to a London-listed mining company, the views and powers of the state where its assets and operations are actually located may ultimately prove to be paramount.