This article was written for and first featured on ukrainian-energy.com
The Code Committee of the Takeover Panel (the “Panel”) recently published its response statement to its consultation paper reviewing certain aspects of the regulation of UK takeover bids. Prompted by considerable negative public commentary during US-based Kraft Foods’ hostile bid for eponymous UK confectioner Cadbury earlier this year, the review was designed to reduce the perceived tactical advantage the operation of the Takeover Code (the “Code”) provided to hostile bidders and redress the balance in favour of the target company.
Among the principal recommendations 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 to the bid,
- increased disclosure of the bidder’s financial information and its financing arrangements, even on cash offers; and
- increased disclosure of the bidder’s intentions in respect of the target and its employees, and provide employee representatives with a greater opportunity to express their views.
If implemented, the proposals could significantly change the landscape in which takeovers of London-listed companies are conducted, and are therefore of clear relevance not only to Ukrainian energy companies like JKX Oil & Gas plc, Cadogan Petroleum plc and Regal Petroleum plc and their shareholders, but also to potential acquirors.
From a target company’s point of view, many of the proposals contained in the response are very welcome. Perhaps most helpful for London-listed companies subject to a potential bid is that under the proposals, bidders would be required to be named in announcements following an approach, no matter which party makes the announcement. The bidder would 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.
By requiring the identity of the bidder to become public, and accelerating the bid timetable, the often lengthy periods where AIM companies find themselves under “siege” by potential bidders who would have no real incentive to declare their intentions (particularly when they have not been named) should be reduced, while at the same time subjecting the target company to the “no frustrating action” restrictions under Rule 21 of the Code. Such situations are common and are not only enormously distracting for target boards but an unnecessarily drain on the company’s financial resources.
At the same time, the Panel also considered other measures which might be taken in with a view to addressing the often decisive influence that undue influence that hedge funds and arbitrageurs who 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 as 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 were 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 which have been raised in the wake of Kraft-Cadbury on its own. Some joined up thinking is required, and perhaps inevitable – given business secretary Vince Cable’s underwhelming public response to the Panel’s review and the recent publication by the UK department of Business, Information and Skills of a call for evidence as part of a review into corporate governance and economic short-termism in capital markets, which has expressly included takeover regulation within its ambit.
There are a number of issues that were not addressed at all within the Panel’s proposals which should be considered as part of this 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, 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 with robust takeover regimes such as Canada and Australia have a 20% stakebuilding 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 companies listed on the AIM market (such as Regal Petroleum). 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 mind and 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 mind and management is located abroad – often without shareholders being aware that the Code does not apply. At a minimum, the AIM Rules should be amended to require better disclosure on this issue, but some consideration should also be given by AIM, together with the Panel, as to whether it would be beneficial to AIM companies, their shareholders and the integrity of the AIM market as a whole for the Code, or at least certain aspects of it, to apply to all AIM companies.
Whatever the outcome of the Panel’s review of the Code, it is clear that there needs to be a more coordinated response taking into account appropriate changes to company, competition and tax law, as well as the Listing Rules and AIM Rules themselves in order to achieve the most effective regulatory takeover regime for companies listed in London.
Finally, as illustrated by the Canadian government’s recent refusal to allow BHP Billiton’s bid for Potash Corporation to proceed, no matter what takeover regime applies to a London-listed company, the views and powers of the state where its assets and operations are actually located may ultimately prove to be paramount. For strategic assets like oil & gas, there can be no doubt that any proposed takeover of a UK plc which holds Ukrainian assets will be heavily, and justifiably, scrutinised by the relevant Ukrainian authorities.