United States: Proposed Changes To The UK Takeover Code

On 21 March 2011 the Code Committee of the UK Takeover Panel (the "Panel") published a public consultation paper (PCP 2011/1) setting out proposed amendments to the UK Takeover Code (the "Code") which were triggered by the Panel following Kraft's £11.5bn hostile takeover of Cadbury last year.

This very public takeover of what was effectively a national institution highlighted the reality that Cadbury could not defend itself effectively against the hostile bid from Kraft, together with Kraft's broken promise to keep Cadbury's Somerdale plant open and thereby retain Cadbury's employees at that plant. Indeed, many will recall that the Panel issued a very rare public censure of Kraft – the first of its kind in three years - after it was held in breach of the Code by reneging on public promises relating to the closure of the Somerdale plant.

Set against this backdrop and a general concern that the Code made it too easy for bidders to destabilise target companies with only vague (rather than certain) offers, the Panel published an initial consultation paper in mid-2010, with a view to revising the Code over the longer term. The Panel views much of its role as policing what ought to be a proper and reasonable balance in takeover bids between the conflicting interests of a bidder and a target. The Panel's recent public consultation resulted from a general feeling that, recently, the balance of interests had shifted unfairly in favour of bidders. After publishing its latest public consultation paper (PCP 2011/1) on 21 March, the Panel has taken another step towards introducing ­significant changes to the Code.

In PCP 2011/1 the Panel referred to a previous Statement (2010/22) which it had issued in relation to these proposed Code amendments in which the Code Committee concluded that:

• hostile offerors (i.e. offerors whose offers are not from the outset recommended by the board of the target company) have in recent times been able to obtain a tactical advantage over the target to the detriment of the target and its shareholders, and that it intended to bring forward proposals to amend the Code with a view to reducing this tactical advantage and redressing the balance in favour of the target; and
• a number of changes should be proposed to the Code to improve the offer process and to take more account of the position of persons who are affected by takeovers in addition to target company shareholders.

The Code Committee has therefore concluded that bidders do, in the process of UK takeover bids, have an unfair advantage over target companies and it has therefore brought forward a number of proposals to amend the Code with a view to redressing the balance in favour of targets. Other changes have also been proposed to the Code in order to improve the offer process in general and to take more account of the position of persons (particularly employees of the target) who are affected by takeovers in addition to target company shareholders. PCP 2011/1 sets out the detailed amendments to the Code that the Code Committee proposes to make in this regard in order to implement the above mentioned conclusions described in Statement 2010/22. Whilst these detailed amendments are beyond the scope of this article we can summarise in general terms what the Code Committee has concluded with regard to making proposed amendments to the Code, as follows:

(a) there should be increased protection for target companies against protracted "virtual bid" periods by requiring potential offerors to clarify their position within a short period of time;

(b) the position of the target company should be strengthened by:

(c) there should be increased transparency and an improvement in the quality of disclosure by:

(d) there should be provision for greater recognition of the interests of target company employees by:

It is generally felt that these proposals will go through without significant amendment, but it remains to be seen whether these new Code rules will prevent another unwelcome scenario like the Kraft/Cadbury takeover and, if they are implemented as planned, whether they will shift the balance of power too much in favour of target companies and away from bidders.

The UK's takeover process is widely regarded as favouring bidders more than the takeover process in most other countries across the world. For example, once a bidder has released an announcement (even a vague announcement of its interest in the target company) concerning a bid for a UK target company, the target is prevented from doing certain things, such as engaging in significant mergers and acquisitions activity, because so-called anti-frustration measures are triggered and this can be unfair on the target. However, whilst it is widely recognised that the present Code is unfair towards target companies and on balance favours bidders, a number of observers had feared that the Panel's approach to its review of the Code would be one of undue overreaction in response to the prevailing public sentiment regarding the Kraft/Cadbury takeover. In these uncertain times, when ­the recovery of corporate activity is somewhat precarious, there is a great awareness that any amendments to the Code in this context should not have the undesirable effect of discouraging deal making.

Perhaps the most significant proposed change to the Code will be to the so-called 'put up or shut up' (PUSU) regime. Under this regime, if a potential bidder is considering making an offer for a target company but is not yet in a position to make a firm bid and the approach is unwelcome to the target, the target may ask the Panel to impose a deadline on the potential bidder to clarify its intentions. If the potential bidder 'puts up' it makes a firm offer and if it 'shuts up' it must state that it has no intention to bid and this usually prevents it from making an offer for the target company for six months. The PUSU order is therefore one of the best devices available to a UK company existing under siege by a predator, but knowing when to use it requires good judgment - if it is used too soon, the target's shareholders may miss the opportunity of a good offer for their company; if however it is used too late, the target company could be damaged following months of uncertainty in the shadow of a potential but unconfirmed bid. The PUSU regime is therefore aimed at stopping predators from effectively holding target companies under siege for an indefinite period of time.

The existing Code requires that the target company must approach the Panel to issue the bidder with a PUSU order, giving the bidder six to eight weeks to either make a firm offer or walk away. Under the proposed revisions to the Code, as soon as a bidder is named publicly the clock will start ticking and the bidder will have only 28 days to make a firm offer. A target company may ask the Panel for an extension to this period, but this request can only be granted towards the end of the 28-day deadline, and the Panel will have the discretion to refuse an extension request. Therefore, it is clear that a bidder will need to be better prepared going into a takeover scenario because it will have to be certain that it will be able to convert an interest in a target company into a firm offer for that target within 28 days of an interest in it being announced.

It is also worth noting that the revised Code would impose a requirement on ­bidders to keep any promises they make regarding the future of the merged companies for 12 months - such as keeping ­a factory open (which of course would have been relevant in the Kraft/Cadbury takeover) - failing which they could be disciplined.

Another significant proposed change to the Code worth highlighting further is the outlawing of deal protection measures, which would see the end of inducement fees, implementation agreements and other offer-related agreements. An exception to this would be if a company was targeted by a ­hostile bidder, in which case the target would be allowed to offer a 1 per cent inducement fee to a 'white knight' (i.e. a company that makes a friendly takeover offer to a target company that is being faced with a hostile takeover from a separate party).

Some commentators have expressed their concern that the elimination of inducement fees will deter the private equity players and therefore reduce transaction activity, because the relevant companies rely on such fees to cover their costs going in to a potential deal. This is particularly so for strategic bidders and ­others who may not wish to engage in a transaction without having the assurance of receiving compensation for a failed bid. It is generally accepted that inducement fees are useful in that regard in takeover transactions, but not if they are too high because there is the consequent risk that they will effectively stop other potential bidders from entering the fray, which is likely to be to the detriment of target shareholders in terms of getting the best deal.

Whilst the proposed revised Code undoubtedly improves the position for target companies, it is still felt by some that there are too limited a number of tools available to the board of a UK target company to protect the target from bidders and, ultimately if possible, raise the bid price for the benefit of the target's shareholders. This is in contrast to other jurisdictions such as the US, where a target company is more likely to remain independent after a hostile bid than in the UK because of the options available to the target boards of US companies. Therefore, whilst hostile bids such as the Kraft/Cadbury one are likely to be more difficult under the proposed revised Code, in reality it remains to be tested in the marketplace whether the revised Code will afford any greater protection for target companies that are subject to a hostile bid from a determined bidder.

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