Kraft’s takeover of Cadbury Schweppes sparked controversy in the UK and led to politicians and business leaders requesting an overhaul of the UK Takeover Code (Code). Following a lengthy consultation process, the Code was substantially amended on 19 September 2011 with a view to addressing the perceived imbalance in UK takeovers between target companies and bidders in hostile situations, and also providing greater transparency to shareholders and employees of target companies. This article seeks to highlight the potential impact of those changes on takeovers in the UK. The principal changes to the Code are as follows:
- Naming of bidders. A target company is permitted to name all potential bidders which it has been approached by, or is currently in talks with, in any announcement it makes to start an offer period. After being named, bidders have 28 days to announce a firm intention to make an offer.
- Except in certain limited circumstances, deal protection measures, such as break fees, are now prohibited.
- Greater transparency and disclosure in the offer documentation of: (i) financial information including the terms of any financing on which the offer depends; and (ii) the bidders intentions for the target’s assets and employees.
Naming of bidders
Target companies must now name any potential bidders in any announcement made starting an offer period. The days of bidders circling target companies and announcing an intention to bid, without actually committing themselves to doing so, are now over. Bidders will therefore need to be prepared to move quickly to launch a takeover offer and should consult with their advisers at an early stage to ensure an inadvertent approach is not made, which could make a bidder susceptible to being named publicly against it wishes.
Given this rebalancing of power, bidders may be deterred from entering into discussions with target companies altogether. Unless Takeover Panel (Panel) consent is obtained, within 28 days of being named, a bidder is required to formally make a bid for a target company or walk away and make a statement of intention not to make an offer. In any case, secrecy at the outset of a potential takeover is clearly going to be of paramount importance to all bidders, since they may not be ready to announce a firm intention to make an offer within 28 days.
Whilst it is applauded that target companies are now able to have more control over bidders in a hostile takeover, they do raise a number of concerns:
- The short timescale (28 days) will put bidders under tight timescales to formally prepare for announcements. This may deter private equity and publicly quoted companies from launching hostile takeovers since they will be named at an early stage. This shortened timeframe may prove insufficient for bidders to undertake meaningful due diligence before announcing a firm intention to make an offer.
- As a result of the global financial crisis, greater due diligence is now undertaken on companies and banks and other financial institutions are taking longer to complete transactions. The shorter timescale will therefore not assist larger and highly-leveraged deals.
- The shorter time period may deter potential M&A activity at a crucial moment in the global economy.
- Target companies will be in a position to leak details of a hostile offer where they have the belief that the bidder will not be prepared in the 28 day period. This may not always be in the best interests of the shareholders of target in receiving the best possible offer for their shares.
Since the changes to the Code have been implemented, the practical implications of the 28-day deadline do not appear to be as draconian as some feared, given that extensions granted by the Panel show that it is possible to secure Panel agreement to a significantly longer bid timetable, as has been the case with Harvard International Plc. Nevertheless, in trying to readdress the balance of hostile takeovers, the knock on effect is that friendly bids may become more difficult to achieve, given there is likely to be more up front costs for bidders on due diligence, in conjunction with less certainty of a successful outcome and certainly more early stage ground work is required around financing before approaching target.
Deal Protection Measures
Except with the consent of the Panel, offer-related arrangements, such as break fees, are now prohibited.
Prior to this prohibition, bidders were reluctant to devote resources to pursuing a transaction without a degree of cost protection in the event that the deal failed. Companies had previously incorporated break fees (also referred to as inducement fees) where a cash sum was payable to the bidder if certain specified events occurred having the effect of preventing the transaction from proceeding. Although these fees were typically limited to 1% of consideration, these provided a meaningful incentive. Break fees still remain the norm across many cross-border M&A transactions not governed by the Code.
The prohibition on break fees is far reaching and may have the following impact on UK takeovers:
- Many investors have argued that the introduction of the break fee prohibition may lead to fewer bidders coming forward at the outset, which would therefore have the inadvertent effect of frustrating, rather than promoting, competitive processes in the interests of target shareholders. Potential bidders, especially private equity houses, may be deterred from embarking on such deals if they are unable to secure their costs and fees.
- As an alternative deal protection, bidders may insist upon hard irrevocable undertakings from a greater number of the shareholders of target. This will ensure bidders having a greater degree of certainty over the successful outcome of the takeover being approved by the shareholders. Securing hard irrevocable commitments from shareholders will not be easy, especially when dealing with larger institutional shareholders who may be reticent to enter into such commitments.
- Stake building in the target company is likely to increase.
Greater Transparency and Disclosure
In the wake of the financial crisis and the greater desire for increased disclosure and transparency on takeovers, offer – related advisers fees, including those in relation to bid financing are now required to be included in offer documentation, broken by category of adviser. Whether the offer is cash or shares and regardless of whether an offer or scheme of arrangement, the bidder is also required to include a summary of key terms of financing and financial information relating to itself.
Bidders are also required to disclose ratings and outlooks in the offer documentation, including short and long term debt ratings. Given the differences often found in the opinions of rating agencies, this additional requirement may cause debate between the parties given that some ratings will be more favourable than others.
A bidder will also be required to disclose, or make a negative statement, regarding its plans and intentions toward the target, including a statement as to its intention toward the employees of the target company. Any statement made by the bidder must remain true for one year from the date the offer is made. In addition, employees are also entitled to appoint an employee representative who will comment on the potential takeover and the impact of the takeover on employees.
The result of this increased disclosure, is that bidders may be mindful about making concrete plans until the one year period has come to an end. A bidder will need to be careful about statements made in any offer documentation as to its intentions toward target employees, since interested parties will keep a watchful eye on any statements made. Whilst hostile bidders who have not undertaken due diligence on target are able to state, in any offer documentation, that a review will be undertaken after control has passed, this would not be acceptable on a recommended offer.
Conclusion
Given that the changes to Code were only implemented at end of September 2011, the true impact of the rebalancing of power between target companies and bidders is yet to be determined. Target companies certainly have more control over takeovers which will ensure more certainty for their boards. Although, the practical implications of the 28-day deadline do not appear to be as draconian as feared, bidders will need to tread carefully before approaching a target company and ensure they are fully prepared for a takeover given the shortened timescales for announcements and the greater degree of control which target companies now have.
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