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Proposed changes to the Takeover Code

12/07/2012

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United Kingdom

Proposed changes to the Takeover Code

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The Code Committee of the Takeover Panel has issued three consultation papers in relation to proposed changes to the following areas of the Takeover Code (the "Code"):

  • Companies that are subject to the provisions of the Takeover Code (PCP 2012/3);
  • Profit Forecasts, Merger Benefit Statements and Material Changes to Information (PCP 2012/1); and
  • Pension Scheme Trustee Issues (PCP 2012/2).


1.  Companies subject to the Takeover Code

At present, the provisions of the Code apply to all public companies which have their registered offices in the UK, Channel Islands or Isle of Man and if either (a) their securities are admitted to trading on a regulated market (which includes the Official List, but not the AIM Market of London Stock Exchange plc) or (b) they are considered by the Panel to have their central place of management and control in the UK, Channel Islands or Isle of Man. The provisions also extend to cover private companies which have their registered offices in the UK, Channel Islands or Isle of Man where, during the previous 10 years, their shares have been admitted to the Official List, their shares have been traded or marketed or the company has published a prospectus.

The Code Committee's consultation paper PCP 2012/3 proposes to amend the provisions of the Code to completely remove the residency requirement test. If such amendments were made then the Code would apply to all offers for public and private companies (subject to a slightly amended 10 year rule requirement, for which, please see below for further details) which have their registered offices in the UK, the Channel Islands or the Isle of Man.

As stated above, the proposals would include private companies which are subject to a revised "10 year rule". This would cover all private companies which, during the previous 10 years either (a) had their shares admitted to trading on a regulated market or a multilateral trading facility in the UK, Channel Islands or Isle of Man; or (b) filed a prospectus for the issue of securities with the registrar of companies or any other relevant authority in the UK, Channel Islands or Isle of Man, or have had such a prospectus approved by the UK Listing Authority.

The Code Committee believes that these changes would provide greater clarity to investors on the application of the Code to UK companies. At present, it is felt that the residency test can mean that a company falls outside of the scope of the Code provisions if the directors relocate. In addition, the Takeover Panel has also experienced difficulties in determining whether the Code applies to a particular company.

2.  Profit Forecasts, Merger Benefit Statements and Material Changes to Information

Consultation paper PCP 2012/1 contains proposed amendments to the provisions of the Code that deal with profit forecasts, merger benefit statements and material changes to information previously published during an offer period.

Profit Forecasts

At present, Rule 28 requires that, if an offeree company or offeror (other than an offeror offering solely cash) publishes a profit forecast during an offer period, then the assumptions upon which the profit forecast is based must be stated and the party concerned must obtain and publish reports on the profit forecast from both its reporting accountants and its financial advisers. Likewise, where a profit forecast has been published prior to the offer period then this will need to be repeated in the offer document or offeree board circular in the same manner and treated as if it had been made during the offer period.

The Code Committee is of the view that the requirements of Rule 28 should generally continue to apply to profit forecasts published during an offer period and to profit forecasts published following an approach with regard to a possible offer being made. However, the Code Committee is proposing the following changes:

(a)  there should no longer be a requirement for reports to be obtained from reporting accountants and financial advisers where a profit forecast has been published before an approach is made in respect of a possible offer (other than where the offer is a cash only offer). Accordingly, it is proposed that, except where Panel consent is obtained, the profit forecast (including details as to the basis on which it has been prepared) should be included in the offer document or offeree board circular together with a directors' statement that the forecast remains valid (or a statement that it no longer remains valid and the reasons why not). Alternatively, a new profit forecast for the relevant period should be prepared and included in the offer document or offeree board circular in accordance with the standard Rule 28 provisions (i.e. on the same basis as a profit forecast made during an offer period or following an approach with regard to a possible offer);  

(b)  where the profit forecast is published by a party to the offer and it relates to a period ending more than 15 months from the date on which the forecast is first published then the Code Committee believes the Panel should be given the power to grant a dispensation from the reporting requirements on the profit forecast, even where the profit forecast is made during an offer period; and

(c)  the Panel should also be given the ability to grant a dispensation from the reporting requirements in circumstances where:

  • a profit forecast is published by a party to an offer in the ordinary course of its communications with its shareholders; or
  • the offer could not result in the issue of securities representing 10% or more of the enlarged equity share capital of the offeror and, in addition, the application of the Rule would be disproportionate.

Unless the consent of the Panel is obtained, the profit forecast regime will apply equally to a profit forecast that relates to a part of the business of a party to an offer.

The Code Committee considers that any forecasts issued in the context of a management buy-out should always be subject to the full reporting requirements in relation to profit forecasts.

Merger Benefit Statements

Note 9 on Rule 19.1 of the Code currently imposes, in certain circumstances, specific content requirements where a party to an offer makes a quantified statement about the expected financial benefits of a proposed takeover or merger.

The Code Committee proposes to introduce a new "quantified financial benefits statement" definition in the Code, which would cover not only statements quantifying the financial benefits expected to arise if an offer is successful but also statements by the offeree quantifying benefits which are expected to arise from other measures (or an alternative transaction) if the offer does not succeed.

The Code Committee considers that the proposed amended provisions of Rule 28 should apply to such quantified financial benefits statements published by an offeror or offeree, save where the statement is made by a cash offeror. The Code Committee therefore proposes to delete the current Note 9 on Rule 19.1 and to conform the quantified financial benefits statement requirements to the general profit forecast requirements in the new Rule 28. However, in addition to these requirements, it is proposed that more detailed guidance should be included in the Code as to the manner in which quantified financial benefits statements must be prepared.

Material Change to Information

Rule 27 currently requires that any material change to the information previously published in an offer document or offeree board circular must be disclosed where the relevant party to the offer publishes a subsequent document in relation to the offer.

The Code Committee considers that:

  • there should be a specific provision included in the Code whereby a party to an offer must disclose any material changes to the information previously published in connection with an offer by way of an announcement and that the Panel is given the power to require the publication of a document containing details of the changes. In addition, it is proposed that the list of matters that require to be updated should be expanded in certain respects; and
  • details of any material changes should continue to be included in any subsequent offer document or offeree board circular - or where there have not been any, a statement to that effect.


3.  Pension Scheme Trustees

The Code Committee has also published a further consultation paper PCP 2012/2 in relation to the extension of the current framework in the Code which exists for the benefit of an offeree company's employee representatives to pension scheme trustees.

These changes, if effected, would require the inclusion in the offer document or offeree board circular of a statement as to the offeror's intentions in relation to the offeree company's pension schemes and the likely impact of its strategic plans for the offeree company on its pension schemes (or, alternatively, a negative statement that the offeror has no intention to make any changes). In addition, copies of documents relevant to the offer (i.e. offer document/board circular, revised documents, possible and firm offer announcements) should also be made available to pension trustees and such trustees should be given the opportunity to have an opinion on the effects of the offer on the offeree's pension scheme appended to the offeree board circular (or published separately, if it is not available in time).

The consultation period for all three consultation papers expires on 28 September 2012.

Nick Heap is a Senior Associate in the Corporate Group of Field Fisher Waterhouse LLP in London.

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