UK: Public Companies Update

Last Updated: 27 May 2011
Article by Mark Howard

There have been a number of developments in the public company arena during the last three months. In this PLC update we summarise:

  • the changes currently proposed to the UK Takeover Code;
  • the new Bribery Act, and in particular the guidance recently published by the Government on how the Act is to be operated;
  • the guidance recently published by AIM Regulation on related party transactions under the AIM Rules for Companies; and
  • the updated guidance recently published by ICSA to assist prospective directors to carry out effective due diligence before joining a new board.

TAKEOVER CODE: PROPOSED CHANGES

Deadline for comments on consultation paper fast approaching

Following Kraft's controversial takeover of Cadbury at the start of 2010, the Code Committee of the Takeover Panel (the "Panel"), in response to political calls for change, began a consultation to review aspects of the Takeover Code (the "Code"). The period for comments on the latest consultation paper ends on 27 May 2011 (see link below to consultation paper). This briefing note summarises some of the key changes proposed which, whilst being less radical than changes proposed in the first consultation paper, may still prove to be significant.

Virtual bids – changes to "put up or shut up" regime

The first change proposed is to the "put up or shut up" regime. The Code Committee proposes to introduce an automatic 28 day period following an announcement of a possible offer. The announcement must identify the potential bidder. The offer period may be extended by the Panel at the request of the target company and potential bidder. It is hoped that these changes will deter "virtual bids" (an announcement, or leak to the market, by a potential bidder that it is considering making an offer without making a commitment to do so).

At present, the Code does not require that the potential bidder be identified in the announcement of a possible offer. Further, the only way for a target company to control the length of the period between a virtual bid and a formal offer, is for the target company to request that the Panel impose a time limit for the potential bidder to either make a formal offer or announce that it does not intend to make an offer for the target company (and be subject to the 6 month restrictions set out in the Code), the so called "put up or shut up" regime.

There is no doubt that virtual bids create uncertainty and disruption for target companies. The decision to identify a potential bidder and/or apply to the Panel for a "put up or shut up" deadline is also often a difficult decision to make for the board of a target company. The changes would make potential bidders think twice about making a virtual bid, until they are almost ready to make a formal offer, in order to avoid prematurely starting the offer period and potentially being linked to failed offers.

The question is whether the changes, which would clearly provide more certainty and control for target companies in the context of hostile bids, will be detrimental to recommended offers (which constitute the vast majority of takeover offers). Crucially, it will be permissible for the board of target companies to apply for an extension of the 28 day period and the guidance in the consultation paper confirms that such requests should normally be granted. However, this request will obviously need to be made within the 28 day period so the pressure will be on to agree deal terms or make substantive progress in this regard. If this cannot be achieved, the bidder will be forced to announce that it does not intend to make an offer and will be shut out from making a bid for the next 6 months, so procuring an extension will be important. Will this result in less offers to which the Code applies and an increase in auction sales (i.e., where the board of a company triggers an offer period by announcing that it is for sale) which would not be subject to these restrictions?

Prohibition of deal protection measures

The consultation paper contains proposals prohibiting, other than in certain limited cases, deal protection measures such as inducement fees, non-solicitation undertakings and no information undertakings. The concern expressed in the consultation paper is that bidders have been able to establish deal protection measures as "standard" and, as such, have gained an unfair tactical advantage over target companies. Deal protection measures may also adversely impact on shareholders' interests by restricting the ability of the board of a target company from recommending or attracting competing offers. Potential takeover targets will certainly be in favour of these changes. The Code Committee has addressed initial concerns that the prohibition of inducement fees would, in the context of a hostile bid, restrict a target board's ability to attract a "white knight", by proposing a limited dispensation to the general prohibition in this case. However, will certain investors, such as private equity buyers, who typically have to invest more time and resources than a trade bidder who knows the business, be deterred from investing without the contractual protection that break fees offer?

Increased disclosure

In order to increase transparency, changes to the Code are proposed requiring both parties to disclose estimates of offer related fees and expenses including advisers' fees. Detailed financial information should also be disclosed in relation to all offers as opposed to just securities exchange offers. Greater disclosure by the bidder of financing arrangements will also be required.

Interests of employees of target companies

Changes are proposed to increase the quality of disclosures made by the bidder in relation to the bidder's plans for the target company and its employees. If the bidder has no plans relating to the target company's employees, location of business or fixed assets then a negative statement must be made. Further, any statements of intention made in the offer document must remain true for at least one year (unless a different period is stated) from the offer becoming or being declared wholly unconditional.

Conclusion

Whilst the proposed changes will strengthen the position of target companies, especially in the context of hostile takeovers, the question is whether the changes will make offers to which the Code applies less attractive. The automatic 28 day period may deter private equity buyers from investing and may prove problematic to small and mid cap companies who may struggle to announce an offer within this period. Whilst the Panel should grant an extension to the offer period this will be an additional consideration which, in addition to the prohibition on deal protection measures and increased disclosure requirements, may make deals even harder to implement.

What happens next?

Comments on the latest consultation paper (PCP 2011/1 issued on 21 March 2011 (http://www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/PCP201101.pdf )) should reach the Code Committee by Friday 27 May 2011. Comments may be sent by post or email to supportgroup@thetakeoverpanel.org.uk. The Code Committee will then issue guidance in relation to the timetable for publication of the response statement and the date for implementation of the amendments.

THE BRIBERY ACT

Guidance recently published

The UK Government has recently announced that the Bribery Act 2010, an act designed to bring the UK in line with the international norms on anti-corruption legislation, will come into force on 1 July 2011. As the Act will be extraterritorial and carry criminal sanctions, it will have far-reaching implications for UK headquartered businesses and multinationals operating in the UK, especially those operating in what are considered to be higher-risk sectors, such as mining and oil and gas, and higher-risk locations, such as developing and emerging economies.

In an attempt to cut through some of the hysteria that had built up around the scope of the Act, the Government has also now published detailed guidance which is intended to clarify how the Act operates and to give a steer on the sorts of procedures that companies should put in place to avoid committing the so called "corporate offence".

The four main offences

The Act introduces four main offences. The first two offences involve the making and receiving of bribes, the third the bribery of foreign officials and the fourth, the corporate offence of failing to prevent bribery. It is this fourth offence which is proving to be the most controversial provision of the new Act.

The corporate offence of failing to prevent bribery

Under the corporate offence, a commercial organisation will be guilty of failing to prevent bribery if an "associated person" performing services on the organisation's behalf offers, promises or gives a financial or other advantage to another person with the intention of obtaining or retaining business or a business advantage for the organisation. An associated person could include employees, agents, joint venture partners, franchisees, introducers or subsidiaries. This is a strict liability offence and the organisation could be found guilty even where it played no role in, and had no knowledge of, the bribery. Organisations will however have a defence of proving that they had "adequate procedures" in place designed to prevent bribery by those performing services on their behalf.

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