Changes to the Takeover Code

Monday 19 September 2011 saw changes to the Takeover Code which strenghtened the hand of companies that find themselves the subject of unwanted takeover speculation. In order to stop target companies being put under siege for long periods, and particularly to prevent potential bidders putting a target into play, and hence under pressure, by announcing that they are considering making an offer, but without committing to doing so (a so-called “virtual bid”):

If a target company announces the existence of a possible offer, or that it is seeking potential bidders, unless otherwise permitted by the Panel the announcement must identify every potential bidder with whom the target is then in talks, or from whom the target has received an approach which has not been unequivocally rejected. All such potential bidders must be named, irrespective of when they approached the target and whether or not any rumour and speculation about the target, or any untoward movement in the target’s share price, was caused by their actions. The announcement will put the target into an “offer period”.

When a potential bidder first makes a possible offer announcement, or a target first makes an announcement that identifies a potential bidder, that potential bidder will, within 28 days of the announcement being made, have to either make a firm offer announcement or announce that it does not intend to make an offer for the target (known as “put up or shut up” or “PUSU”) unless either:

•The Panel agrees to extend the PUSU deadline. Only the target, and not the bidder, can request an extension or
•Another potential bidder has already made a firm offer announcement, or subsequently makes a firm offer announcement before the deadline expires.

Likely repercussions

•Potential bidders may well delay approaching a target until they are fairly confident that they will be in a position to announce a firm offer if they decide to do so. This is likely to mean potential bidders doing more due diligence and strategic planning before an approach is made.
•Private equity bidders may consider financing bids entirely through equity and then later syndicating the equity funding or refinancing it with debt. Private equity bidders will also usually be particularly keen to ensure that there is no announcement of their interest in the target or, if an announcement is made, that the target requests an extension to the PUSU deadline, because they may find it difficult to complete their due diligence within 28 days.

In addition, a bidder and any person acting in concert with it will be prohibited in most circumstances from entering into any “offer-related arrangement” with the target or any person acting in concert with it during the offer period or when an offer is reasonably in contemplation. “Offer-related arrangements” include break fees (inducement fees), exclusivity agreements, matching rights and other “deal protection” measures that are commonly sought by bidders. Offer-related arrangements that are entered into prior to the Implementation Date will be unaffected. The prohibition is likely to cause potential bidders to look for other ways to reduce the risk of bid failure. In some circumstances, this might mean bidders or their associates buying target shares in the market, or entering into a derivative contract referenced to target shares, particularly once an offer is likely to be made. Bidders may also pressurise their advisers to agree to more success-based fees.

Other changes require bidders to include more information in their offer document about how the offer is financed; the impact of the offer on the bidder’s earnings, assets and liabilities; and the fees payable to advisers in connection with the offer. Target employees will have more opportunity to make public their views on the offer and its impact on the target.

This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, click here.