A new version of the Takeover Code will take effect on Monday, 19 September 2011. Subject only to a few modifications, the Panel has decided to adopt the amendments to the Code which were proposed in its consultation paper of March 2011 - and summarised in our earlier briefing note. These changes follow a period of review and consultation dating back to February 2010, and represent a conscious attempt on the part of the Panel to tilt the balance of power in a UK takeover back towards the target company.
This briefing note summarises the key changes and considers some of the possible implications for public M&A practice in the UK.
Rule 2.4/ possible offer announcements & "put up or shut up (PUSU)" period
From 19 September, all "possible offer" announcements made under Rule 2.4 of the Code which commence an offer period will be required to identify the potential bidder(s). Currently, it is sufficient for a target company to announce that it is in talks with an unnamed third party or parties, or that a potential bidder is considering making an offer for the company. In addition, a "possible offer" announcement, whether released by the prospective bidder or target, will trigger an automatic 28 day "put up or shut up (PUSU)" deadline by which time the named bidder must either commit to a "firm intention to make an offer" announcement, or publicly withdraw from the offer process. Any such withdrawal would prevent a subsequent approach by the prospective bidder for a period of between 3 and 6 months. There is scope for the Panel to agree an extension to this 28 day deadline, but only on request from the target company.
The Panel will generally only give its decision regarding an extension close to the expiry of the original 28 day period ie. it is not something that can be agreed in advance of the original announcement.
Possible implications
1) Use of Rule 2.4 announcements - it seems very likely the combination of these two changes will, as is intended, reduce the use of early stage Rule 2.4 announcements by prospective bidders either as a means of putting public pressure on a reluctant target, or of testing market reaction to a potential deal. The new 28 day deadline, and lack of certainty upfront as to whether any extension will be granted, will mean that prospective bidders unsure of a target board's support will want to be better prepared - in terms of due diligence, financing arrangements and even transaction documentation if, for example, a UK prospectus is required - before voluntarily triggering an offer period, or indeed before making a first approach.
2) Secrecy - the importance of absolute secrecy in the run-up to a first announcement is already a familiar Code principle. From the bidder's point of view, this importance will only increase under the new Code, given the potential of any inadvertent leak to put the bidder in the position of needing to be ready to make its "firm intention" announcement within 28 days. From the target's perspective, it would not want to risk losing a potential bidder because the 28 day period has been triggered too early in the process.
3) Target leaks/ use of the "possible offer" announcement as a defensive measure - by rushing to put out a "possible offer" announcement at the first opportunity, or bringing about circumstances where it is obliged to do so ie. leaks, a target company would be able to impose the stringent 28 day PUSU deadline on an unwanted bidder. Whilst the circumstances in which a target can put out a Rule 2.4 announcement are limited under the Code, this tactic may have some appeal to a reluctant target.
Prohibition of deal protection measures
Break/ inducement fees
Any commitment by a prospective target to pay the bidder a break, or inducement, fee should a transaction abort will be prohibited under the new Code. There are some very limited exceptions: payments to a "white knight" coming in to rescue a target from a hostile bidder, or where a potential target puts itself up for auction, and in both cases subject to the 1% de minimis limit that currently applies to all break fees. But essentially break fees, which as the Panel noted during the consultation phase have become a market standard, will cease to be part of the M&A picture in the UK.
Other deal protection measures
So too other deal protection commitments given by a target to a bidder at the outset of a transaction are prohibited. The Panel has set out at some length in its consultation what it is targeting here:- for example, non-solicit/ exclusivity undertakings which prohibit a target from actively seeking alternative offers whilst a particular bid is "live", and/ or require it to notify the initial bidder on receipt of any third party approaches; or matching or topping rights, which commit the target to allow an initial bidder a period of time to decide whether to match or beat any offers subsequently received.
Also caught by the prohibition are implementation agreements, which are used nearuniversally on takeovers effected by way of scheme of arrangement, and include undertakings given by the target to the bidder as to its implementation of the scheme, thus allowing the bidder some control over what is a target-driven process.
Indeed, the only deal protection measures which will be permitted from 19 September, are those specifically identified in the new Code, which include:-
- Irrevocable commitments and letters of intent by shareholders (irrevocable commitments by directors in their capacity as directors are prohibited);
- Confidentiality undertakings provided these do not fetter a target's ability to release announcements during an offer period;
- Undertakings not to solicit employees, customers or suppliers;
- Any commitments which bite only on the prospective bidder eg. standstill arrangements, or "reverse" break fees.
Possible implications
1) Potential deterrent to bidders - many have suggested during the consultation phase that the abolition of deal protection measures will have a negative effect on deal activity by discouraging bidders from entering the fray. This has been raised particularly by the private equity industry. Others are more sceptical, pointing out that break fees and related bidder protections are only a relatively recent development in UK M&A. There is of course no way to predict the effect on deal activity in the UK- on this, we shall have to wait and see.
2) Schemes of arrangement - more predictably, it seems very likely that the prohibition of implementation agreements will reduce the appeal of schemes as a way of effecting takeovers over contractual offers in those scenarios where a bid is being, or will potentially be, contested. The Panel has to some extent anticipated this, and the new Code will include a requirement on a target to stick to a published timetable in its carrying out of the scheme.
However, there are some fairly significant get-outs to this requirement - for example, if the target board decides it no longer wishes to recommend the scheme - and overall it seems fairly clear that bidders will not receive the same level of protection from this addition to the Code that they have been used to getting in the extensive undertakings given in an implementation agreement. It is likely that we will see more bidders exercising an election to switch from a scheme to a contractual offer once a competitive bid is tabled.
3) Irrevocables - with virtually all other deal protection measures prohibited, this is likely to further increase the importance attached by a bidder to irrevocable undertakings given by the target's directors (in their capacities as shareholders only) and/ or key shareholders, as the only means for it to secure commitments from the target in relation to the deal pre-announcement.
Additional disclosure obligations
In an effort to increase transparency, the new Code will also include some additional disclosure obligations, for example:
- Greater detail on bid financing (including commitment fees, term and key covenants). These financing documents will need to be available for display from the announcement of a firm intention to make an offer.
- Details of all fees and expenses expected to be incurred by both parties broken down by category of adviser; and
- An obligation on the bidder to include financial information on itself, even for a cash offer (which may impact on timing of a "firm intention" announcement if bidder is subject to a PUSU deadline).
These additional requirements are summarised in our earlier briefing note - but are not of a nature that are likely to effect deal activity in a significant way, and as such are not covered in this note.
Conclusion
As some have already observed, the law of unintended consequences will no doubt apply in relation to these imminent changes to the Takeover Code, such that it will only really be possible to assess their impact after the fact. What is clear is that the changes, although less radical than some of those considered by the Panel as part of its consultation process, are significant, and will have an impact on how public company M&A transactions are conducted in the immediate future.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.