UK: Takeover panel consultation following Kraft

Summary and implications

The Code Committee of the Takeover Panel has published a consultation paper on a range of fundamental aspects of the Takeover Code. A number of the issues raised arguably go beyond regulating the conduct of public takeovers and extend to wider considerations. Political, economic and commercial implications of takeovers, from both the micro level of specific stakeholders such as employees and the macro level of the UK's national interest, are all considered.

Unusually for the Panel, the consultation paper does not propose detailed changes to the Code, but creates an open forum to allow a range of issues to be debated, although implementing a number of them will require parliamentary action.

Given the broad range of issues raised, a larger than usual number of responses can be expected when the consultation closes on 27 July 2010.

Impact of Kraft's takeover of Cadbury

The consultation has been launched due to political pressure to review the way in which takeover bids are conducted in the UK following Kraft's takeover of Cadbury earlier this year. Kraft's conduct during its bid for Cadbury has been publicly criticised by the Panel which concluded that certain statements of belief issued by Kraft were made without any reasonable basis. Of particular interest to the advisory community has been the emphasis of the Panel on the degree of verification required of companies and their advisers in respect of statements of belief (for further details see our briefing note on the Panel's criticism of Kraft "Corporate Alert - Advisers beware - Kraft censure puts the spotlight on Rule 19", click here).

Kraft's takeover of Cadbury has prompted a number of complaints, mainly political, that the Code is failing in its objective to provide an orderly framework within which UK takeover bids are conducted. For example:

  • that it is too easy for hostile bidders to force their bids through by obtaining control of more than 50% of the voting rights of the target company; and
  • that short-term investors are having undue influence on takeovers, especially as their interests are unlikely to be aligned with those of other stakeholders (such as employees) and long-term shareholders.

There is therefore a desire in many political quarters to curb the influence of short-term investors on the outcome of takeover bids and to make it generally more difficult for hostile takeovers to succeed.

Open forum

Unusually for the Panel, the consultation paper does not propose detailed changes to the Code, but creates an open forum to allow a range of issues to be debated. This is not surprising given the scope of the issues raised, a large number of which are clearly politically driven and go beyond the Panel's usual focus on purely procedural matters.

Suggested amendments to the Code

A number of the issues raised for consideration may require changes to some of the fundamental principles of UK company law and are likely to be of interest or concern to those regularly involved in UK takeover activity, including:

  • raising the 50% plus one minimum acceptance condition to 60% or two thirds of the voting rights in the target (which raises the question of what influence a shareholder who holds between 50% and 60% should have);
  • withholding voting rights from shares in the target acquired during the offer period (contradicting the basic ownership right of shareholders);
  • reducing the 1% trigger threshold for disclosure of dealings and positions in relevant securities to 0.5%; and
  • introducing limits on and further disclosure of advisors fees on takeovers, particularly "success" fees.

Difficulties raised by proposals

Although many of the issues address concerns raised by politicians, they also give rise to a host of unintended and arguably less desirable consequences, such as challenging the "one share one vote" principle through suspending voting rights. Raising the acceptance threshold above 50% will also create split thresholds at which statutory control passes under company law and control passes by way of a contractual offer. These conflicting areas will need to be reconciled and demonstrate the challenging nature of the issues raised.

Given the broad range of issues raised, a larger than usual number of responses can be expected when the consultation closes on 27 July 2010.

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.

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