The takeover of Cadbury plc by Kraft Foods Inc. in early 2010
prompted widespread public discussion about the regulation of UK
takeovers. Concern was expressed that it was too easy for a hostile
offeror to obtain control of an offeree company and that the
outcomes of takeovers, particularly hostile offers, were unduly
influenced by the actions of "short term" investors. On 1
June 2010, the Code Committee (the "Code Committee") of
the Takeover Panel (the "Panel") issued a public
consultation paper (the "Consultation Paper") containing
suggestions for amendments to the Takeover Code (the
"Code") to address these concerns.
In its formal response to the consultation published on 21 October
2010, the Code Committee has decided to implement certain of the
suggested amendments aimed principally at:
- reducing the tactical advantage obtained in recent times by hostile offerors and redressing the balance in favour of the offeree company;
- ensuring greater account is taken of the position of persons affected by takeovers in addition to offeree company shareholders, most notably employees; and
- increasing transparency and improving the quality of disclosure.
Although it welcomed the Code Committee's proposals for
seeking to redress the balance between the offeror and the offeree,
the UK Government has responded by launching a consultation of its
own. The purpose of the Government's consultation is to
determine whether more can be done to promote long-term growth
rather than short-term financial gain by examining the economic
issues underlying takeovers and the corporate law framework
governing takeovers. The outcome of this consultation will be
keenly awaited to see whether it will result in further changes to
the UK takeover regime.
A summary of the amendments proposed by the Code Commmittee is set
out below. The proposed amendments have not yet come into effect
and will form the basis of one or more future consultation papers
to be issued by the Code Committee. Therefore, break fees for
example, which the Code Committee has recommended be prohibited,
will continue to be permitted until specific rules prohibiting them
are introduced following such further consultation. However, it is
likely that the Panel Executive will be keeping a closer eye on
compliance with certain other existing Rules affected by the Code
Committee's recommendations, such as the employee information
and other disclosure requirements contained in the Code
Committee's recommendations, such as the employee information
and other disclosure requirements contained in the Code regarding
the Offeror's plans for the oferee and its employees. In
addition, put up or shut up deadlines could be shortened.
Subject |
Proposed amendment |
Restriction of "virtual bids" |
Following an approach, any announcement commencing an offer
period must name the potential offeror. |
Deal protection measures and inducement fees |
Except in controlled auctions, offerees will no longer be able
to give: |
Factors offeree boards may consider in opining on/recommending the offer |
The Code will be clarified so as not to limit the factors the
offeree board may consider in opining on or recommending an
offer. |
Disclosure of offer-related fees |
The following will need to be disclosed: |
Disclosure of financial information on an offeror |
The following will need to be disclosed: |
Disclosure of offeror's intentions regarding the
offeree company and its employees |
Offerors must continue to disclose plans for the offeree's
employees, locations of business and fixed assets and will now have
to make a negative statement if no such plans exist. Save with
Panel consent, unless another period is stated, such statements
must hold true for at least one year after the wholly unconditional
date. |
Views of employee representatives |
Offeree boards must inform employee representatives at the
earliest opportunity of their right to circulate an opinion on the
effects of the offer on employment. The offeree will be responsible
for publishing and paying for the opinion. |
The suggested amendments contained in the Consultation Paper which
the Code Committee does not "currently" intend to
implement are as follows (these include many of the more
fundamental suggestions mooted in the Consultation Paper):
Suggested amendment |
Rationale for not implementing |
Raising acceptance condition threshold above 50% plus
one |
The 50% plus one threshold is based on the threshold for passing
an ordinary resolution (the resolution needed to replace a board).
Without an equivalent change in English company law, any change to
the Code would be futile. For example: |
Disenfranchising shares acquired during the offer
period/introduction of qualifying period before shares can carry
voting rights/weighted voting rights |
Disenfranchising short-term shareholders would be contrary
to: |
Providing protections for offeror company shareholders
similar to those afforded to offeree shareholders |
Protection of offeror shareholders under the Code is unnecessary
given protections afforded by company law, offer director fiduciary
duties and the rules of other regulatory authorities, including the
UK Listing Authority. |
Reduction of disclosure threshold from 1% to 0.5% |
The Code's disclosure regime was revised recently to provide
greater transparency. The Code Committee will continue to monitor
the appropriateness of the disclosure threshold. |
Reintroduction of restrictions on the speed at which
substantial acquisitions of shares can be made |
Reintroducing rules equivalent to the Rules Governing
Substantial Acquisitions of Shares abolished in 2006 would place an
unnecessary restriction on share dealings where control of a
company was not passing or being consolidated. These rules
restricted the speed at which persons were able to increase a
holding of shares and rights over shares between 15% and 30% of the
voting rights of a company, 30% being the threshold at which the
Code considers control of a company to pass. |
Shortening of offer timetable |
The maximum period for the publication of offer documents should
remain at 28 days since: |
Separate advice for offeree shareholders |
The Rule 3 financial adviser's advice to the offeree board,
the substance of which is disclosed to offeree shareholders, should
be relied upon as being genuinely independent. A requirement for
separate advice for shareholders would increase costs without
providing any material benefit. |
Splitting up of dealing, voting and offer acceptance
decisions |
The Code Committee will give further consideration to whether
proportionate measures could be introduced to enhance transparency
where the dealing, voting and offer acceptance decisions attached
to a discloseable shareholding have been split between two or more
persons. |
Disclosure of offer acceptance/scheme voting
decisions |
Increased transparency in relation to offer acceptance or scheme
voting decisions would not provide significant benefits. |
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.