The Panel has made some changes to the Code, with effect from 30 September 2013, as a result of its 2012 Consultation Paper (PCP 2012/1) on profit forecasts and related matters. This note summarises certain key points.
The Panel sought views on a possible relaxation of the regime relating to profit forecasts set out in Rule 28 of the Code. The Panel thought that there should be greater consistency between the Code and other legislation, including the Listing Rules. The regime for profit forecasts should be more "proportionate", particularly in the case of certain statements made before an offer was in contemplation, and the Panel should have greater authority to give dispensations from the requirements of Rule 28. The requirement for reporting on "merger benefit" statements should apply whether or not an offer was recommended and, in addition, should extend to statements made by a target company as to benefits it forecast in the event that a merger did not take place. The provisions of Rule 27 relating to material changes to information in published takeover documents should be changed so that they reflected more closely listed companies' continuing obligations.
Rule 19.1, on the standards of care and accuracy required when documents are published or statements are made in the course of an offer, remains in force and continues to be of general relevance to the publication of profit forecasts and "merger benefit" statements.
Some Concepts
Rule 28 does not apply to profit forecasts or "merger benefit" statements made by a cash offeror. In such a case, the target company shareholders are relying upon the "cash confirmation" (Rules 2.7(d) and 24.8), that the offeror will be able to pay the consideration money when due, and so forecasts as to the performance of the offeror are much less relevant.
The definition of "profit forecast" has been tweaked to bring it into line with other legislation, but essentially remains the same.
An "ordinary course profit forecast" is a profit forecast published by a company in accordance with its established practice and as part of the ordinary course of its communications with its shareholders and the market. A party to an offer wishing to rely on this regime will need to persuade the Panel that the relevant forecast falls within this definition (Note 2(c) to Rule 28.1).
A "profit estimate" is a profit forecast for a financial period which has expired and for which audited results have not yet been published. Under Rule 28.5, the Reporting Regime (see below) does not apply where the estimate is included in certain half or full year results statements which comply with the applicable regulatory rules. Given the terms of this exemption, such compliance would likely need to be confirmed with the Panel in advance.
A "quantified financial benefits statement" includes, as before, a statement by the relevant company of the financial benefits expected to accrue to the enlarged group if the offer is successful. This now applies whether or not the offer is recommended. However, the definition has been extended to include, in addition, a statement by the target company of any benefits arising if the offer does not proceed.
Care must be taken when publishing profit forecasts for future periods, especially once the offer period has commenced. Whilst it may be possible in certain cases to comply with the less onerous regime under Rule 28.2(a) for reports relating to a future financial year, Rule 28.2(b) will however require profit forecasts to be published for the current and any intervening financial years, and as the normal rules on reporting will then apply to these additional forecasts, the Reporting Regime (see below) would normally apply to at least the profit forecast for the current financial year.
The Reporting Regime – Rule 28.1(a)
Where the Reporting Regime applies, then, except with the consent of the Panel, the relevant party will need to include two reports in the document or announcement in which the profit forecast or quantified financial benefits statement is first published.
The first is a report from the party's reporting accountants stating that, in their opinion, the forecast or statement has been properly compiled on the basis stated in and, for profit forecasts only, that the basis of accounting used is consistent with, the company's accounting policies.
The second such report is a report from the party's financial adviser stating that, in its opinion, the forecast or statement has been prepared with due care and consideration.
The Directors' Confirmations Regime – Rule 28.1(c)
Except with the consent of the Panel, where the target company or a non-cash offeror published a profit forecast before it received or made an approach with regard to a possible offer, the offer document or target company board circular (as appropriate), or any earlier document or announcement published during the offer period in which the profit forecast is referred to, must repeat the profit forecast and include a statement by the directors that it remains valid and confirmations by the directors that the profit forecast has been properly compiled on the basis of the assumptions stated and that the basis of accounting used is consistent with the company's accounting policies.
In certain circumstances, as an alternative, the relevant party may instead include a statement by the directors that the profit forecast is no longer valid and an explanation of why that is the case; or include a new profit forecast for the relevant period and the reports required by the Reporting Regime.
Publication of Profit Forecast in Offer Period
The Reporting Regime will apply here unless:
- the profit forecast is an "ordinary course profit forecast" for a period ending fifteen months or less from publication, in which case the Directors' Confirmations Regime will apply if all the parties to the offer agree (Note 2(b) to Rule 28.1); or
- it is an "ordinary course profit forecast" for a period ending more than fifteen months from publication, in which case the Directors' Confirmations Regime applies (Rule 28.2(a)).
Publication of Profit Forecast before Offer Period begins
Where a non "ordinary course profit forecast" is published prior to the start of the offer period but after an approach has been made, the Reporting Regime will apply, in accordance with Rule 28.1(b).
In any other case, the Directors' Confirmations Regime normally applies, so the directors may either give the necessary confirmations themselves or, where appropriate, explain why the profit forecast is no longer valid or publish a new profit forecast to which the Reporting Regime will apply.
Certain other features of the new regime
Where the offer is a management buy-out or similar transaction or is being made by the existing controller or group of controllers, the Panel will not normally grant any dispensations from the Reporting Regime; and even where the profit forecast was published by the target company before it received an approach, the Panel will normally require the profit forecast to be repeated subject to the Reporting Regime when the offer document or any earlier announcement is published or made.
To avoid disproportionate application of the Reporting Regime, the Panel may grant a dispensation where a profit forecast by an offeror is not material, either because the consideration securities will not represent a material proportion of its enlarged share capital or, alternatively, a material proportion of the value of the offer.
The Code now makes clear, in Note 5 to Rule 28.1 that Rule 28 applies in the same way to a profit forecast relating to any part of a business as it does to a profit forecast relating to the group as a whole.
Rules 28.7 and 28.8 contain an updated regime for the publication of investment analysts' forecasts on websites and making references to consensus forecasts relating to another party to an offer. The detail of these two Rules is outside the scope of this note.
Rule 27 has been updated in order to bring it closer into line with listed companies' reporting requirements under other regulatory rules. Now, following the publication of the initial offer document or target company board circular, and until the end of the offer period, the offeror or the target company (as appropriate) must promptly announce any changes in information disclosed in any document or announcement published by it in connection with the offer which are material in the context of that document or announcement and any material new information which would have been required to have been disclosed in any previous document or announcement published during the offer period had it been known at the time.
Where such an announcement is required, the Panel may, in addition, require a document setting out the relevant information to be sent to shareholders in the target company and made readily available to the target company's employee representatives. It remains to be seen how this will operate in practice, although there must be a real likelihood that the Panel will insist upon further documents being sent to shareholders given that the information must be material in order to be required to be announced in the first place. If one of the parties to the offer published a profits warning, for example, one would think that the Panel would almost certainly want target company shareholders to be sent a follow-up document giving further information.
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