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The takeover of Cadbury plc by Kraft Foods Inc. in early 2010
prompted widespread public discussion about the regulation of UK
takeovers. Concern was expressed that it was too easy for a hostile
offeror to obtain control of an offeree company and that the
outcomes of takeovers, particularly hostile offers, were unduly
influenced by the actions of "short term" investors. On 1
June 2010, the Code Committee (the "Code Committee") of
the Takeover Panel (the "Panel") issued a public
consultation paper (the "Consultation Paper") containing
suggestions for amendments to the Takeover Code (the
"Code") to address these concerns.
In its formal response to the consultation published on 21
October 2010, the Code Committee has decided to implement certain
of the suggested amendments aimed principally at:
- reducing the tactical advantage obtained in recent times by
hostile offerors and redressing the balance in favour of the
- ensuring greater account is taken of the position of persons
affected by takeovers in addition to offeree company shareholders,
most notably employees; and
- increasing transparency and improving the quality of
Although it welcomed the Code Committee's proposals for
seeking to redress the balance between the offeror and the offeree,
the UK Government has responded by launching a consultation of its
own. The purpose of the Government's consultation is to
determine whether more can be done to promote long-term growth
rather than short-term financial gain by examining the economic
issues underlying takeovers and the corporate law framework
governing takeovers. The outcome of this consultation will be
keenly awaited to see whether it will result in further changes to
the UK takeover regime.
A summary of the amendments proposed by the Code Commmittee is
set out below. The proposed amendments have not yet come into
effect and will form the basis of a further consultation paper
expected to be issued by the Code Committee in Q1 2011. Therefore,
break fees for example, which the Code Committee has recommended be
prohibited, will continue to be permitted until specific rules
prohibiting them are introduced following such further
consultation. However, it is likely that the Panel Executive will
be keeping a closer eye on compliance with certain other existing
Rules affected by the Code Committee's recommendations, such as
the employee information and other disclosure requirements
contained in the Code Committee's recommendations, such as the
employee information and other disclosure requirements contained in
the Code regarding the Offeror's plans for the oferee and its
employees. In addition, put up or shut up deadlines could be
shortened. It is expected that the new rules, as adopted following
the further consultation, will come into effect in late Spring of
Restriction of "virtual bids"
Following an approach, any announcement commencing an offer
period must name the potential offeror.
Except with the Panel's consent or for controlled auctions,
the named potential offeror must, within 28 days, either: (a)
announce a firm intention to make an offer; (b) announce that it
will not make an offer, in which case it will be bound by Rule 2.8
of the Code and potentially be prevented from bidding for up to six
months; or (c) apply to the Panel jointly with the offeree for an
In exceptional circumstances, before the commencement of an offer
period and where, following a private approach, an offeree is
subject to an unacceptable level of siege (e.g. because it could
then be impeded in the running of its business under the Code rules
against frustrating action), the Panel could consider imposing a
private "put up or shut up" deadline on the potential
Rationale: to provide certainty on the length of
the offer process and prevent protracted "virtual bids"
which place offerees under siege; reduces incentive for offeror(s)
Deal protection measures and inducement fees
Except in controlled auctions, offerees will no longer be able to
(a) inducement/break fees; or
(b) save in limited circumstances, undertakings to take action to
implement a takeover or refrain from taking action which might
facilitate a competing takeover. This prohibition wil extend to no
shop and exclusivity arrangements as well as matching rights,
undertakings by an offeree to inform the original offeror of an
unsolicited approach and no information undertakings.
To cater for the impact that the change described in (b) will have
on agreements by offerees to implement scheme of arrangement
takeover offers, the offeree will, in the case of a recommended
scheme of arrangement offer, have to implement the scheme in
accordance with a timetable agreed with the Panel (subject to the
withdrawal of the offeree board recommendation).
Permitted undertakings by an offeree will include: (a) maintaining
the confidentiality of offeror information; (b) not soliciting the
offeror's customers or employees; and (c) providing information
necessary to satisfy offer conditions or obtain regulatory
Rationale: (a) to strengthen the offeree's
position; and (b) to prohibit deal protections which are
detrimental for offeree shareholders and deter competing offerors
or lead them to offer less favourable terms.
Factors offeree boards may consider in opining
on/recommending the offer
The Code will be clarified so as not to limit the factors the
offeree board may consider in opining on or recommending an
Rationale: the Code should not be taken to require
offeree boards to consider the offer price as the sole determining
Disclosure of offer-related fees
The following will need to be disclosed:
(a) the estimated aggregate fees of each party;
(b) a breakdown of the estimated fees of each category of adviser
to the parties, including the minimum and maximum amounts payable
(i.e. advisers' success/incentive fees will not be prohibited,
save to the extent already provided in the Code). Any material
changes to the estimated advisers' fees must be announced;
(c) financing fees.
Disclosure may be made in a manner that does not reveal
commercially sensitive information regarding the offer.
Rationale: greater transparency and improved
quality of disclosure.
Disclosure of financial information on an
The following will need to be disclosed:
(a) detailed financial information on an offeror. This will be
required in all offers, not just securities exchange offers as has
been the case to date;
(b) where the offer is material (no guidance has been provided on
what would be "material"), a pro forma balance sheet of
the combined group and offeror financial ratings, including changes
resulting from the offer; and
(c) greater details of acquisition debt financing used by the
offeror. Offeror debt financing documents will need to be on public
Rationale: improved quality of disclosure and
greater transparency for constituents in addition to offeree
shareholders, e.g. directors, employees, customers and creditors of
the offeror and offeree.
Disclosure of offeror's intentions regarding the
offeree company and its employees
Offerors must continue to disclose plans for the offeree's
employees, locations of business and fixed assets and will now have
to make a negative statement if no such plans exist. Save with
Panel consent, unless another period is stated, such statements
must hold true for at least one year after the wholly unconditional
Rationale: better quality information will enable
all interested constituents to comply with their own obligations
and inform offeree shareholders and employees properly.
Views of employee representatives
Offeree boards must inform employee representatives at the earliest
opportunity of their right to circulate an opinion on the effects
of the offer on employment. The offeree will be responsible for
publishing and paying for the opinion.
The Code will be amended so as not to prevent the passing of
information in confidence to employee representatives.
Rationale: to improve the ability of employee
representatives to make their views known.
The suggested amendments contained in the Consultation Paper
which the Code Committee does not "currently" intend to
implement are as follows (these include many of the more
fundamental suggestions mooted in the Consultation Paper):
Rationale for not implementing
Raising acceptance condition threshold above 50% plus
The 50% plus one threshold is based on the threshold for passing an
ordinary resolution (the resolution needed to replace a board).
Without an equivalent change in English company law, any change to
the Code would be futile. For example:
(a) if an offer lapsed when the offeror had obtained more than 50%
acceptances but less than the increased threshold, the position of
the offeree company board would be unsustainable;
(b) an offeror might obtain statutory control of the offeree
company by purchasing more than 50% but fail to satisfy the
increased threshold, with the result that the offer lapsed; it
would have acquired statutory control but accepting shareholders
would be denied an exit; and
(c) offerors might be prompted to seek control of offeree
companies via changes to the board ahead of, or instead of, making
an offer for the company.
Disenfranchising shares acquired during the offer
period/introduction of qualifying period before shares can carry
voting rights/weighted voting rights
Disenfranchising short-term shareholders would be contrary
(a) the principle of "one share, one vote" and impair the
economic rights attaching to the shares; and
(b) the principle of equal treatment for all shareholders of the
same class enshrined in General Principle 1 of the Code.
Providing protections for offeror company shareholders
similar to those afforded to offeree shareholders
Protection of offeror shareholders under the Code is unnecessary
given protections afforded by company law, offer director fiduciary
duties and the rules of other regulatory authorities, including the
UK Listing Authority.
It could involve an inappropriate extraterritorial application of
the Code to foreign offerors and create an uneven playing field
between competing offerors.
An offeror shareholder vote requirement could allow easy lapsing of
an offer and reduce certainty of delivery of an offer.
Reduction of disclosure threshold from 1% to
The Code's disclosure regime was revised recently to provide
greater transparency. The Code Committee will continue to monitor
the appropriateness of the disclosure threshold.
Reintroduction of restrictions on the speed at which
substantial acquisitions of shares can be made
Reintroducing rules equivalent to the Rules Governing Substantial
Acquisitions of Shares abolished in 2006 would place an unnecessary
restriction on share dealings where control of a company was not
passing or being consolidated. These rules restricted the speed at
which persons were able to increase a holding of shares and rights
over shares between 15% and 30% of the voting rights of a company,
30% being the threshold at which the Code considers control of a
company to pass.
Shortening of offer timetable
The maximum period for the publication of offer documents should
remain at 28 days since:
(a) offer periods are likely to become shorter as a result of the
proposed changes to the "put up or shut up" regime
(b) it is not normally in an offeror's interests to delay the
publication of its offer document; and
(c) for a securities exchange offer requiring the production and
approval of a prospectus, the offeror is likely to need the full 28
Separate advice for offeree shareholders
The Rule 3 financial adviser's advice to the offeree board, the
substance of which is disclosed to offeree shareholders, should be
relied upon as being genuinely independent. A requirement for
separate advice for shareholders would increase costs without
providing any material benefit.
Splitting up of dealing, voting and offer acceptance
The Code Committee will give further consideration to whether
proportionate measures could be introduced to enhance transparency
where the dealing, voting and offer acceptance decisions attached
to a discloseable shareholding have been split between two or more
Disclosure of offer acceptance/scheme voting
Increased transparency in relation to offer acceptance or scheme
voting decisions would not provide significant benefits.
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