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This article first appeared in Legal Week on 15 September 2011.
19 September will see the implementation of the changes to the Takeover Code that result from the review undertaken by the Takeover Panel after the takeover of Cadbury plc by Kraft Foods Inc. in 2010.
There will be significant changes to the strategies adopted by offerors and their advisers as a result of the changes to the Takeover Code (the “Code”). There will also be a shift away from the Code’s current, almost exclusive focus on the interests of offeree shareholders to a broader perspective on the various categories of stakeholder affected by an offer, including, in particular, the interests of employees.
The Current Regime
Over recent years, many offerors have made announcements stating that they are considering a possible offer. The period during which a potential offeror has made such an announcement but has not committed to making an offer is referred to as a “virtual bid” period. Prominent examples of potential offerors making possible offer announcements include the announcement made by Kraft Foods Inc. in relation to Cadbury plc on 7 September 2009 and the announcement made by Xstrata plc in relation to Anglo American plc on 21 June 2009. This was taken to an extreme in relation to National Express plc, when a series of approaches meant that the company was in a virtual bid period for several months in 2009 without an offer being made at any point.
Extended virtual bid periods allow offerors to pursue their possible offers at a minimal cost to the offeror. Conversely, virtual bid periods have a potentially damaging effect on the offeree as a result of the uncertainty created by the possible offer. Offeree companies may encounter difficulty retaining and attracting employees, as well as customers and suppliers being reluctant to enter into long term contracts. In addition, such companies face restrictions on significant corporate activity because of the rule in the Code preventing frustrating action. In addition, during such a period, when the offeree’s share price is inflated by the news of the possible offer, existing shareholders often sell their shares to new shareholders, in many cases to hedge funds. Those new shareholders, having acquired their shares at a premium price, may well make a loss if the offer is not successful, again securing the offeror an advantage in the offer process.
The New Regime
Under the new regime, when a leak announcement is made, an offeree company must name the potential offerors with whom it is in discussions or from whom it has received an approach that it has not unequivocally rejected. On or before the 28th day after that announcement, or after its own initial announcement, a potential offeror will need to either commit to making an offer, confirm it will not make an offer or, together with the offeree company, obtain an extension to the 28 day deadline. Protracted hostile virtual bid periods are therefore likely to be a thing of the past.
In addition, as a result of these changes, potential offerors are likely to be much more concerned about avoiding premature leaks of the possible takeover.
Another change to existing bid strategy is that offerors are likely to delay the approach to the offeree company in order to undertake as much preparatory work as possible so that if, after the approach, there is a leak, the offeror is in a position to pursue its offer within the prescribed 28 day period.
The incentive to leak news of a potential offer may have moved from the offeror to the offeree, since offerees that are in receipt of an unwelcome approach may leak it in order to allow the potential offeror as little time as possible to prepare to make an offer. However, this strategy would nevertheless result in the negative features of being in an offer period, albeit for a shorter timeframe.
Perhaps strangely, given that the new rules are designed to make the Code less biased in favour of hostile offerors, there are likely to be more hostile offers under the new regime. This is because some hostile offerors who find themselves prematurely put into an offer period with a very short deadline to make a bid, will make a hostile offer rather than concede defeat. The initial offer might be priced at a level that does not represent the offeror’s best possible offer. However, it will allow the offeror to continue to pursue its offer within the timetable and framework of the Code. If necessary, it could be increased later in the offer timetable.
Another aspect of the amended regime that will be less attractive for offerors is the new prohibition of inducement fee agreements.
A Broader Perspective
The new Code regime recognises that there are other stakeholders with an interest in the outcome of a takeover in addition to offeree shareholders and expressly acknowledges that the value of a bid is only one criterion by which an offer is to be judged.
The Code now requires an assessment of the impact of the offer on the business of the offeror and offeree. The Code also requires a detailed description of the offeror’s financing arrangements for all bids and financial information in respect of the offeror, irrespective of the nature of the offer. This has not hitherto been required where the offer was in cash and there was no possibility of an offeree shareholder remaining as a minority shareholder after the transaction e.g. the offer is structured as a scheme of arrangement. The increased prominence given to employees and their representatives in the offer process also reflects the recognition that it is not just offeree shareholders that are affected by an offer.
As with the other changes, market practice will determine how successful the Code changes are. However, the change in emphasis is to be applauded.
Overall, there are likely to be fewer bids in the future since many potential offerors will avoid being identified early on in the process of evaluating a potential offer and will not wish to commit to making an offer so quickly after a leak.