21 Mar 2012

This article was first featured on Growth Company Investor

Kraft’s hostile takeover of Cadbury Schweppes in 2010 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.

Perhaps the most significant change in the revised Code is to the “put up or shut up” regime. Not only must a prospective bidder now be publicly named in any announcement by target commencing an offer period, but thereafter it now has only 28 days either to launch a bid, or walk away and be precluded from making an offer for at least 6 months.

An important exception to this deadline is where the target company and the Takeover Panel (Panel) agree to an extension, though extension applications will not be considered until the deadline is near expiration. The 28 day deadline also will not apply where the target has initiated a formal sale by means of a competitive auction.

Background and reasons for the new “put up or shut up” regime

Previously, a potential bidder, whether or not publicly named, was able speculatively to approach the target about a bid without any hard obligation to ever commit itself to a formal offer. The potential bidder could either lurk privately in the background or make a “virtual bid” and assess target shareholder appetite and even the price at which a bid would be successful. In either case, this could be done at a relatively low cost to the bidder, but at considerable cost and disruption to the target company, who could be under siege for months without any certainty around the bidder’s intentions. The previous regime did permit a target company to ask the Panel to issue a “put up or shut up” notice, requiring a bidder to either make a formal offer or walk away within a six to eight week period. However, there was often a reluctance by target boards to do so as they did not want to be seen by shareholders to be actively preventing a potential bid from materialising. In the end, the Panel took the view that this state of affairs was destabilising for target companies and their boards who needed greater protection from hostile bidders. As a bidder cannot unilaterally request an extension to the 28 day period, the target company has clearly been given the upper hand.

What has been the impact so far?

When the Panel issued its Consultation Paper on the revised Code, a key concern around the proposed “put up or shut up” changes was that the 28 day deadline was far too short – how could even friendly bidders adequately undertake due diligence and ensure financing was available in such a short timescale and in a challenging economic climate? An examination of takeover activity since the changes were introduced would tend to support that view. At the end of the first 28 day “put up or shut up” period, which expired on 17 October 2011, nine companies subject to the deadline sought and obtained extensions from the Panel:

– three bids, including Sanlam UK Limited’s offer for Merchant Securities Group Plc, were granted a 14 day extension where the parties were finalising terms or at an advanced stage of negotiations

– five bids, including AmWins Group Inc. offer for THB Group Plc, were granted 28 day extensions to allow completion of pre-conditions; and

– one bid, Rami Cassis’ offer for Parseq plc was granted a five day extension, followed immediately by a further one day extension as the deal was close to being finalised after the 28 day period and quickly proceeded to firm intention offer stage during extension period.

Following on from this first “put up or shut period” the Panel has continued to grant extensions – to such companies as Arena Leisure plc, CryptoLogic, K3 Business Technology Group plc – with the reasons ranging from further time to complete due diligence, obtaining regulatory consents, acceptance of bank conditions and finalising a strategic review.

Perhaps the most interesting extension case to date is the bid by Chengdu Geeya Technology Co. Ltd for Harvard International plc. The possible offer for Harvard was originally announced on 28 September 2011, and any formal offer was stated to be subject to shareholder approval on the bidder side. Obtaining regulatory approvals in China was anticipated to happen within four months. Notwithstanding the new 28 day deadline, the Panel has granted three successive 28 day extensions. One can only assume that the Chinese bidder is likely to have been given informal assurances that those further extensions would be forthcoming, provided the regulatory and other conditions to the bid were being addressed in line with the indicated timetable. Similarly several extensions were granted regarding the possible offer by Red Label Vacations Inc. for Travelzest Plc in order to enable the bidder to finalise its legal and financial due diligence.

Has the takeover landscape really changed?

In light of frequency and the perceived “automatic” nature of the Panel’s extensions, one can be forgiven for wondering whether the new 28 deadline has made any practical difference at all to the conduct of takeovers.

While insufficient time has passed since the new rules were introduced to gauge the extent to which the new “put up or shut up” regime may have deterred bidders – whether friendly or hostile – from coming forward at all, there has been some evidence that the new 28 day deadline has made a tangible impact on takeovers. For example, Ladbrokes plc abandoned its approach for Sportingbet plc at the end of the 28 day period because of the questions around the legality of Sportingbet’s operations in Turkey and other concerns about legacy risks involved in the takeover. Similarly, French investment firm SGP’s potential bid to takeover DTZ Holdings plc was also impacted by the deadline as it announced that it would not make an offer on the final day it could do so. The fact that DTZ ultimately slid into administration shortly thereafter certainly raises the question of whether more negotiation time would have increased the prospect of resolution to these issues and whether the 28 day deadline forced a rushed decision.

The potential offer for Mitchells & Butler plc, a UK pub and restaurant company, by it largest shareholder, Piedmont (the investment vehicle of billionaire Joe Lewis) was withdrawn shortly before the expiry of the 28 day period. The target board of Mitchells & Butler did not welcome the bid, which may have led to the breakdown in talks, and arguably the deadline in this case worked as the Panel intended by minimising disruption to the target company and preventing a lengthy siege. That said, as many hostile approached ultimately end up becoming recommended offers, it could also be argued that the looming 28 day deadline prevented major shareholders from exerting influence to drive the offer price per share closer to the 300p bench mark the board had been encouraging had more time been available. We may well see that in similar circumstances in future that major shareholders of a target company will seek to pressure the board to obtain an extension from the Panel even where the proposed price is not yet at a level which the board can recommend.

Looking forward

The practical implications of the 28-day deadline do not appear to be as draconian as some feared and extensions granted by the Panel in the case of Harvard International show that it is possible to secure Panel agreement to a significantly longer bid timetable. What can be said with certainty is that the playing field has changed in favour of the target board, since only the target can seek an extension to the deadline, a useful weapon in a hostile takeover situation. It will be interesting to see whether target shareholders will exert pressure on target boards to seek extensions even in hostile situations on the basis that more time may lead to agreement, whether the Panel would be amenable to granting an extension in such circumstances remains to be seen.

The Code Committee has said that intends to review their operation following a period of 12 months, subject to the level of bid activity during that period. As a result of the number of extensions granted to date, it would not be a surprise if the Panel chose to adopt a slightly longer initial time period than 28 days to reflect what is actually happening in practice. In addition the Panel may consider the possibility of requesting an extension at an earlier stage, so not to tilt the balance too far to the target boards. What is clear is that until such time as the deadline in meaningfully extended, potential bidders and their advisers on UK takeovers will be spending more time preparing before approaching targets.

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