UK Takeover Panel Recommends Code Change

by Robin Pilgrim, LawAndTax-News.com, London

26 October 2010

Following a review of the regulation of company takeovers, the Code Committee of the United Kingdom’s Takeover Panel has published its conclusions and proposals, and has concluded that the tactical advantage perceived to be held by hostile bidders needs to be reduced.

Its proposals follow an earlier public consultation paper on possible amendments to the UK’s Takeover Code. To the extent that it has recommended changes arising out of the current review, the Committee will also publish one or more public consultation papers in due course setting out the proposed amendments in full.

The Committee confirmed that, since the Code was adopted in 1968, the Panel has been focused on the protection of offeree company shareholders and the maintenance of an orderly framework within which takeovers may be conducted. It believes that the Code “has served its constituencies and the markets well over that time, and the views expressed by respondents and others during the course of the consultation have confirmed this”.

However, it recognizes that there have been substantial and radical changes in market practice and the wider corporate and economic environment, and, following deals such as Kraft Foods' controversial takeover of Cadbury plc in February this year (although that example is not named in the review), “interested constituencies express views indicating that market practice has evolved such that one party to a transaction to which the Code applies has an unfair advantage in the offer process.”

Those views, it says, indicate that it has become too easy for ‘hostile’ offerors (i.e., offerors whose offers are not from the outset recommended by the board of the offeree company) to succeed; and that the outcome of offers, and particularly hostile offers, may be influenced unduly by the actions of so-called ‘short-term’ investors (for example, persons who become interested in the shares of an offeree company only after the possibility of an offer has been publicly announced).

The Committee, therefore, intends to bring forward proposals to amend the Code with a view to reducing this perceived tactical advantage of hostile bidders, and redressing the balance in favour of the offeree company. In addition, the Committee proposes a number of changes 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 offeree company shareholders.

In its opinion, amendments to the Code should be proposed with the objective of increasing the protection for offeree companies against protracted ‘virtual bid’ periods. Would-be offerers would have only four weeks to make a formal bid or walk away. It would also prohibit deal protection measures and inducement fees, other than in certain limited cases.

To increase transparency and improving the quality of disclosure, offer-related fees would have to be disclosed, and the Committee would clarify that offeree company boards are not limited in the factors that they may take into account in giving their opinion and recommendation on an offer. It would also require the disclosure of the same financial information regarding an offeror and the financing of an offer, irrespective of the nature of the offer.

In addition, to provide greater recognition of the interests of offeree company employees, it would improve the quality of disclosure in relation to the offeror’s intentions regarding the offeree company. The decision of Kraft to close a plant in the UK, against previous assurances, was particularly contentious following its takeover of Cadbury.

While Vince Cable, the Business Secretary, has expressed an opinion that the Committee’s recommendation did not, perhaps, go far enough in restricting the influence of those short-term investors, such as hedge funds, during an offer period, the Institute of Directors has welcomed the approach taken by the Committee and that it has “erred on the side of caution”.

Roger Barker, the Institute’s Head of Corporate Governance said that “depriving certain shareholders of their voting rights would have been mistaken. However, we are disappointed that the Panel has not supported our proposal that all bids for major UK listed companies should be conditional on achieving the support of the shareholders of the acquiring company. We still believe this would be in the interests of shareholders and would increase the legitimacy of takeover activity in the eyes of employees and other parties with a stake.”

He added that “the Takeover Code must continue to support the UK as a leading destination for foreign investment and as a leading location for corporate headquarters and operations. It would be undesirable for takeover policy to be perceived as a pretext for protectionism, as part of an industrial strategy, or as the outcome of a political lobbying process.”

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