UK: New UK Rules For Public Takeovers Come Into Force 19 September 2011 – Practical Implications For Bidders

On 21 July 2011, the Takeover Panel published the final version of its revised rules governing takeovers of UK public companies. The media frenzy surrounding Kraft's takeover of Cadbury was a catalyst for reviewing the regulation of takeover bids in the UK. Some of the more controversial suggestions, such as raising the acceptance level required for success and disenfranchising short term shareholders, have not made the final cut. Nevertheless, many of the changes coming into force on 19 September 2011 remain controversial with both domestic and international bidders.

The new rules will have implications not only in the likelihood of a bid being made but in terms of the chances of a takeover succeeding and the cost of a successful bid. The combination of a short period after the first public announcement of a possible bid within which bidders must either make a firm offer or withdraw and the prohibition of most deal protection measures may well also lead to a decrease in the number of hostile or contested bids.

Transitional provisions mean that targets and bidders need to be familiar with the rules prior to their implementation as certain provisions, including identification of bidders, will apply to transactions begun before 19 September.

Impact of the new rules on bidders

The new rules are intended to strengthen the target's position by increasing its protection against "virtual bids" and increasing/improving disclosure quality (including to employees). Key issues for bidders include:

• their potential early public identification;
• following public identification, four weeks to announce a firm offer or withdraw;
• no break fees/deal protection mechanisms from the target company;
• the specific disclosure of deal and advisers' fees (along with generally enhanced disclosure of financial information);
• greater recognition of target employees' interests; and
• public statements made during the course of a bid are binding for 12 months following a successful bid.

Effective pre-bid planning will become even more key to the success of a proposed takeover and the avoidance of wasted costs.

Key aspects of the new rules:

Dealing with a leak – firm announcement within 28 days

Broadly, under the existing rules, a leak/confidentiality breach is likely to require an announcement. To issue an announcement of a formal offer, the bidder and its financial adviser must first believe the bidder can implement the offer. Financing must be in place on a "certain funds" basis, that is, that the bidder can show it has sufficient cash available to implement the bid. This means all loan documentation and equity commitments must be signed up (and subject to the bid becoming unconditional be available for drawdown) and the tax structure decided.

Under the existing rules, a target will usually therefore issue a holding announcement, commonly not including bidder details, pending its ability to make a firm announcement.

Currently a target can, following a holding announcement, request the Panel require a bidder to issue a notice requiring the bidder to either make a formal offer within six to eight weeks or withdraw (commonly called a "put up or shut up" or "PUSU"). The new rules remove target flexibility and any leak will normally require :

• all potential bidders, at the time of the announcement, to be named; and
• a holding announcement which will trigger a mandatory 28 day PUSU.

This means that bidders may have to work to a much shorter timeframe. The 28 day PUSU will also create an uneven playing field amongst potential bidders depending upon the timing of the leak. For example, an approach received from a second bidder after a holding announcement by a first bidder will not normally require identification of the second bidder, unless that bidder is identified by rumour and speculation. If the identity of the second bidder is announced subsequently, each bidder will be subject to its own deadline.

Whilst the four week period may be extended following an application by the target, extension applications will not be considered until the deadline is near expiration and a bidder will not be able to oblige a target to request an extension. If the target wants a common deadline, it will have to request extensions as appropriate. (A bidder cannot make this request unilaterally).

The 28 day deadline will not apply where, rarely, the target has initiated a formal sale of UK Takeovers itself by means of a competitive auction.

It remains to be seen whether the new rules will be used strategically to advantage/ disadvantage bidders by flushing out competition, or whether approaches to a target are formally withdrawn within a short timeframe, minimising the possibility of an entity being considered to be a potential bidder and named at the time of a leak.

No deal protection

In the past, whilst there were a number of legal issues that a company proposing to undertake to pay a break fee must consider, break fees and other standard deal protection arrangements were a commonplace feature of most bids. Under the new rules, no deal protection measures will be permitted, including break fees, implementation agreements and exclusivity arrangements, save with the Panel's consent or where a target has initiated a formal sale of itself by means of a competitive auction. The restrictions apply to agreements entered into both before and during an offer.

The new rules only apply to arrangements with the target. Deal protection measures entered into with shareholders (such as irrevocable commitments and letters of intent) will be permitted.

Disclosure: press/investor communications

The revised Code significantly increases the bidder's disclosure burden. Bidders must:

• provide detailed financial information on an offer and the financing of an offer which must be disclosed on all offers, not just where shares are being offered by way of consideration. Offer documents must contain details of debt facilities and refinancing instruments, including the: amount; repayment terms; interest rates; security; key covenants; identity of the main financing banks; and deadline for any refinancing facilities. All financing documents must also be published on a website; and
• give enhanced disclosure of their intentions regarding the target and its employees (including negative statements). The bidder must state its intentions with regard to: the future business of the target and explain the longterm commercial justification for the offer and its plans the continued employment of the employees of the target group, including any material changes in the conditions of employment.

The implications flowing from inaccuracy in any disclosure will have greater significance following implementation of the revised rules, as any public statement of intention made during the offer period must be adhered to by the parties for at least 12 months following an offer being declared unconditional, unless there has been a material change of circumstances. The question of whether a material change has occurred has superseded an earlier reference in the proposals to the question of whether it was reasonable at the time for the party to make the statement.

"Employee representatives", a newly defined term covering both representatives of trade unions recognised by either party and persons elected to represent employees, should also become better informed and more able to make their views known. The target must either circulate the employee representatives' opinion on the effect of the offer with its own defence document or publish it on a website.

Information must be disclosed on the aggregate amount of offer-related fees, including financing fees and advisers' fees (such as financial advisers, corporate brokers, accountants, lawyers and public relations advisers) and this must be disclosed by category of adviser.

Some suggested principles for pre-bid planning

• As currently, a bidder should do its best to avoid early identification by ensuring its, and its advisers', strict adherence to a fundamental rule of the Code: secrecy.
• All information relating to a bid should continue, as previously, to only be passed on a "need to know" basis to a restricted number of recipients who are aware of the secrecy rule and required to sign confidentiality agreements.
  
  The need for secrecy and confidentiality has always been an essential part of any pre-bid planning; the consequences of disrespecting these rules under the new takeover regime will, however, have greater impact than under the old.
• A bidder will however be unable to prevent leaks from the target, other bidders or their respective advisers, which may provoke an announcement naming the bidder through no fault of its own.
• Bidders should recognise that seeking to perform more than pre-approach due diligence with the target may incur greater risk of being publicly named when unprepared.
• Financing arrangements should always be considered at an early stage and bidders should be prepared for rapid and intense negotiation of financing documentation in case of and following a leak.
• Following an approach to the target board, bidders should work closely with the target board so that the target board is convinced that it will be in the target's interest to request an extension of the deadline for formal bids. If the four week period is likely to be inadequate, bidders may wish to consider minimising expenditure prior to extension of the deadline.

The Code Committee believes that the benefits of introducing the amendments to the Code will outweigh any additional burdens and costs. This remains to be seen, but given the significance of the changes the Committee intends to review their operation following a period of 12 months or so, subject to the level of bid activity during that period. What can be said with certainty is that the playing field has changed.

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.