UK: The Revised UK Takeover Code: Employment Considerations

Last Updated: 6 December 2011
Article by Sarah Gadd


In the UK, when an offer is made to acquire all the shares of a publicly listed company, the terms of that "takeover" and all conduct relating to it are principally governed by the City Code on Takeovers and Mergers (the Takeover Code). Compliance with the Takeover Code is monitored by the Takeover Panel. 

Among other requirements, the Takeover Code includes rules governing the information that bidders must include in their "offer" or "bid" documents. This includes a requirement on the bidder to disclose its intentions as regards the future of the target business and the impact the bid may have on the target's employees. This can be a delicate point when considering the statements to include with respect to the target's employees, particularly when it is not clear whether headcount reductions or site closures may be required at the point when the offer document is published.

Revised Code

Revisions to the Takeover Code relating to bidder intention statements and employee information rights became effective on September 19, 2011, following a year-long review of the rules by the Takeover Panel. One key driver for this review was a high-profile takeover in 2010 where the bidder came under significant criticism for its decision, a week after the takeover, to close a UK site (and layoff a number of employees) when the offer document and related statements by the bidder's management had stated the bidder's intentions to continue to operate the site and preserve the associated jobs.

Among other reforms, the revised Takeover Code now includes amendments that are intended to provide greater recognition of the interests of the target's employees in a takeover scenario. The revised Takeover Code seeks to achieve this through a two-pronged approach:

  • First, by requiring better disclosure by the bidder of its intentions regarding the offeree/target's employees
  • Second, by improving the ability for employee representatives of the target to give their views in relation to a proposed takeover

Better Disclosure

The obligation on the bidder to include in the offer document information about its intentions regarding the target and its employees has been given renewed focus by the new Rule 24.2 of the Takeover Code.

Rule 24.2 of the Takeover Code requires the bidder to "state its intentions with regard to the future business of the offeree company and explain the long-term commercial justification for the offer." In addition, the bidder is required to state:

  • Its intentions with regard to the continued employment of the employees and management of the target and of its subsidiaries, including any material change in the conditions of employment
  • Its strategic plans for the target, and their likely repercussions on employment and the locations of the target's places of business
  • Its intentions with regard to any redeployment of the fixed assets of the target

Rule 24.2 also requires the bidder to make the same statements listed at (i) and (ii) in respect of its own employees. These stipulations are more detailed than the requirements of the previous Takeover Code, and are clearly intended to flush out more specific disclosure about any bidder plans which could affect the bidder or the target's employees.

In a statement about these amendments in the revised Takeover Code dated July 21, 2011, the Code Committtee of the Takeover Panel clarified that "it might be legitimate for a hostile offeror which has not had an opportunity to undertake full diligence on the offeree company to state that it will undertake a review of the company's business once it has obtained control of the company." This guidance is likely to give comfort to bidders in a hostile takeover scenario where they have not been able to carry out a detailed review of the target operations on which to base their future proposals. The Code Committee also noted that "statements of a general nature are unlikely to be acceptable in the context of a recommended offer where the offeror has had an opportunity to undertake full due diligence." This further demonstrates that the Takeover Panel are keen to clamp down on broad generalizations being available as a "get-out" for bidders trying to avoid making unpopular statements, particularly where they have had access to carry out diligence on the target's operations.

Negative Statement

In addition, under the revised Rule 24.2, if the bidder has no intention to make any changes in relation to the matters listed at (i) through (iii) above, or if it considers that its strategic plans for the target will have no repercussions on employment or the location of the target's places of business, then it must make a statement to that effect.

This new requirement to make a "negative statement" is particularly noteworthy and it is clear that in including this obligation, the Takeover Panel is seeking to avoid instances where bidders can avoid making unpopular statements by remaining silent.

Held to What You Say

The revised Takeover Code goes further still by requiring that where a statement is made in any published information relating to the action which that party intends to take (or not take), the party will be bound to that statement for 12 months from the end of a takeover offer period unless a different time period is specified in the statement or there has been a "material change to circumstances."

In the context of a statement about employees, this is clearly intended to avoid the situation where the bidder states that it has no intention to make redundancies and then changes its approach within weeks of the takeover being achieved. It will be interesting to see whether as a result of this requirement, bidder statements become more qualified in either time limitation or substance. As in all Takeover Code related issues, the level of change required for a "material change in circumstances" to justify the reversal of an earlier statement will be high, and a very difficult test for potential offerors to meet, even in these uncertain economic times.

Involving the Employees or Their Representatives

Since amendments to the Takeover Code in May 2006, following the implementation in the UK of the EU Directive on Takeovers, employee representatives have been able to append their opinion of the employment effects of the takeover offer to any defense document issued by the target companies. However, since that rule was introduced in 2006, there have only been a handful of examples of employee representatives doing so. In their review of the Takeover Code, the Code Committee of the Takeover Panel found that the process was difficult to use and should be made more accessible. The following changes have been made to the revised Takeover Code to address this concern:

  • Revised definition of "employee representative" — the previous definition of employee representative was deemed to be unduly wide making compliance difficult to measure. The definition has therefore been narrowed.
  • Guidance on equality of information — the revised Takeover Code incorporates a note clarifying that Rule 20.1 of the Takeover Code, which requires equality of information to be provided to different shareholders, does not prevent information being passed to employees or their representatives.
  • Obligation on target to inform employee representatives of its right to give an opinion — the revised Takeover Code includes new obligations on the target to inform the target employee representatives of their right to give an opinion on the bid (see boxed text below).
  • Cost of employee opinion — the revised Takeover Code requires the target to cover the reasonable costs incurred by the employee representatives in obtaining advice to verify the accuracy of any statements made in their opinions.

It remains to be seen whether these changes will lead to more involvement of employee representatives in the takeover process. 

Employee Information Rights Under the Revised Code

The Revised Code contains the following requirements for information to be made available to appropriate employee representatives (or if there are no representatives, to the employees themselves):

Rule 2.12 — Announcements

  • Any announcement of a possible offer commencing an offer period should be made available by the target to the target employee representatives or, where there are no such representatives, the employees themselves.
  • Following the announcement of a firm intention to make an offer under Rule 2.7, the announcement or a circular summarising its key terms and conditions must be made readily available by the bidder and target to their respective employee representatives or, where there are no such representatives, their respective employees. If only a circular is sent out, the full text of the announcement should also be made available to bidder and target employees, for example on the company's website.
  • When the target makes an announcement or circular summarising the terms and conditions of an offer available to its employee representatives (or directly to the target employees), this announcement or circular must inform them of their right (under Rule 25.9) to have a separate opinion appended to the target board's circular to shareholders in connection with the offer, and that the reasonable costs incurred in obtaining advice on the verification of that opinion will be met by the target.

Rules 25.1 and 25.9—Offer documentation

  • If target board sends a separate circular to its shareholders containing its opinion on a bidder's offer (e.g. where the offer is not recommended by the target board), that circular must, at the same time, be made readily available to the employee representatives or employees of the target.
  • Any opinion of the target's employee representatives on the effect of the takeover offer on employment provided in relation to the bid must also be appended to the target board's circular (if it is provided in good time) or published on a website and announced via the Regulatory Information Service (RIS) (if it is provided later, and provided it is received no later than 14 days after the offer is declared wholly unconditional).

Rule 32.1 and 32.6—Revised Offer documentation

  • Any revised offer document and the target board's opinion on any such revised offer should be made readily available by the bidder and target to their respective employee representatives, and where there are no such representatives, their respective employees.
  • Any opinion of the target's employee representatives on the effect of the takeover offer on employment which is provided in relation to a revised offer must also be appended to the target board's circular (if it is provided in good time) or published on a website and announced via RIS (if it is provided later, and provided it is received no later than 14 days after the offer is declared wholly unconditional).

Note that the revised Takeover Code did not go so far as to prescribe the way in which a document can be made "readily available" although it is expected that parties should not lessen the method of communication with their employee representatives or employees than would be customary outside of the takeover situation. In its commentary of July 21, 2011, the Code Committee of the Takeover Panel also noted that where a request is made by employees or employee representatives for a hard-copy document, that document should be provided.

What's the Risk?

The Takeover Code requires that all statements made by a bidder or target in the course of an offer must "be prepared with the highest standards of care and accuracy and the information given must be fairly presented." The directors of the company making the statement are responsible if this standard is not met. All documents sent to shareholders (including those which must also be made available to employees and employee representatives) must contain a "responsibility statement" given by the directors accepting responsibility and confirming that, to the best of their knowledge and belief (having taken all reasonable care to ensure that such is the case), the information contained in the document is in accordance with the facts and, where appropriate, that it does not omit anything likely to affect the import of such information.

Interestingly, where employee representatives or employees publish an opinion in respect of an offer, this requirement to issue a "responsibility statement" does not apply. However, there is a requirement that the employee representatives' or employees' statements are verified to Takeover Code standards, at the cost of the target company.

It is an offense not to comply with the rules of the Takeover Code relating to the contents of an offer or response document and any director, shareholder or officer of the bidder or target who has caused a document to be issued can potentially be liable to private or public censure if there is evidence of reckless or wilful non-compliance with the Takeover Code.

What's Next?

The revised Takeover Code brings the already delicate issue of how employees will be affected by a takeover into sharper focus. As a result, going forward it is likely that employee considerations will move higher up the agenda for board members involved in takeovers, both on the bidder and the target side.

The Takeover Panel proposes to carry out a review of how the revised Takeover Code has operated in 12 months' time after the changes have had time to bed in.

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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