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Print articleTakeover rule changes welcome but not a panacea
September, 2011 - Stephen Trombala
Last year’s takeover of Cadbury by US firm Kraft left a bitter taste in many mouths, not least the Cadbury workers in the Somerdale Plant near Bristol who were promised their jobs were safe but were then ultimately ‘rationalised’ by the American food giant. The hostile acquisition of the British chocolate institution, which was ultimately unable to defend itself against the advances of its behemoth American suitor, generated much discussion and debate amongst UK politicians and led to the instigation of new rules aimed at strengthening the hand of UK companies in takeover situations.
On Monday, four significant amendments to the Takeover Code, the regime which governs takeovers in the UK, will come into effect. These amendments are designed to reduce the tactical advantage that offerors are perceived to have under the existing takeover regime.
The new rules will also of course be relevant to Scotland PLC, which has over recent years seen a number of significant public companies - Scottish Power, Scottish & Newcastle and Dana to name a few - acquired by overseas firms.
The first and most significant change is the introduction of a requirement to name a potential acquiror in any announcement of a possible deal. The potential acquiror will then have a period of 28 days in which to announce its offer, failing which it will have to withdraw for a period of six months.
This new naming requirement and the subsequent 28 day 'put up or shut up' period should encourage potential acquirors to conduct their negotiations confidentially with the target board and to avoid leaks to the media. This in turn should curtail the possibility of protracted, share register-destabilising 'virtual offers' which have been a characteristic of so many recent UK takeovers.
The rule changes also herald an end to deal protection packages, including the usual 'no shop' undertakings and one per cent inducement fee which had become the market standard in recommended bids.
These changes could well result in the pre-bid confidential negotiations between potential acquirors and targets being conducted in a less confrontational manner.
It remains to be seen what impact the abolition of deal protection packages will have on private equity-backed bids, which traditionally have relied upon work-fee arrangements and inducement fees as a means of protecting themselves against transaction abort costs. In any case, private equity-backed bids have not been a major feature of recent Scottish takeovers with the exception of Forth Ports.
The third key change will throw light into the murky world of deal fees and expenses. The new rules will require the deal fees and expenses of both the potential acquiror and offeree to be disclosed, including the fees of investment banks, lawyers, accountants and PR, as well as the costs of financing an offer.
This greater transparency is to be welcomed as it should result in more competitive pricing and better informed decisions being made when selecting advisory teams. The new rules will also require more detailed disclosures to be made in respect of the manner in which a bid is to be financed, another change which is to be welcomed.
The final point, which goes to the heart of the furore that followed Kraft's decision to make Cadbury workers in Somerset redundant, is a new requirement that statements made by an offeror regarding the employees and operational plans of a target firm must hold good for at least 12 months following the closing of an offer.
It’s fair to say that these new rules are much more an evolution than a radical shake up of the UK M&A regime. They will increase the onus on suitor firms to be well prepared in advance of making any approach and will result in target companies being ‘in play’ for a shorter period of time and less destabilised as a result. Notwithstanding all the heat generated by the political debate that followed Kraft's takeover of the UK chocolate maker, the new rules do not constitute a ‘Cadbury's Law’ which will protect UK PLC from overseas bidders.
On Monday, four significant amendments to the Takeover Code, the regime which governs takeovers in the UK, will come into effect. These amendments are designed to reduce the tactical advantage that offerors are perceived to have under the existing takeover regime.
The new rules will also of course be relevant to Scotland PLC, which has over recent years seen a number of significant public companies - Scottish Power, Scottish & Newcastle and Dana to name a few - acquired by overseas firms.
The first and most significant change is the introduction of a requirement to name a potential acquiror in any announcement of a possible deal. The potential acquiror will then have a period of 28 days in which to announce its offer, failing which it will have to withdraw for a period of six months.
This new naming requirement and the subsequent 28 day 'put up or shut up' period should encourage potential acquirors to conduct their negotiations confidentially with the target board and to avoid leaks to the media. This in turn should curtail the possibility of protracted, share register-destabilising 'virtual offers' which have been a characteristic of so many recent UK takeovers.
The rule changes also herald an end to deal protection packages, including the usual 'no shop' undertakings and one per cent inducement fee which had become the market standard in recommended bids.
These changes could well result in the pre-bid confidential negotiations between potential acquirors and targets being conducted in a less confrontational manner.
It remains to be seen what impact the abolition of deal protection packages will have on private equity-backed bids, which traditionally have relied upon work-fee arrangements and inducement fees as a means of protecting themselves against transaction abort costs. In any case, private equity-backed bids have not been a major feature of recent Scottish takeovers with the exception of Forth Ports.
The third key change will throw light into the murky world of deal fees and expenses. The new rules will require the deal fees and expenses of both the potential acquiror and offeree to be disclosed, including the fees of investment banks, lawyers, accountants and PR, as well as the costs of financing an offer.
This greater transparency is to be welcomed as it should result in more competitive pricing and better informed decisions being made when selecting advisory teams. The new rules will also require more detailed disclosures to be made in respect of the manner in which a bid is to be financed, another change which is to be welcomed.
The final point, which goes to the heart of the furore that followed Kraft's decision to make Cadbury workers in Somerset redundant, is a new requirement that statements made by an offeror regarding the employees and operational plans of a target firm must hold good for at least 12 months following the closing of an offer.
It’s fair to say that these new rules are much more an evolution than a radical shake up of the UK M&A regime. They will increase the onus on suitor firms to be well prepared in advance of making any approach and will result in target companies being ‘in play’ for a shorter period of time and less destabilised as a result. Notwithstanding all the heat generated by the political debate that followed Kraft's takeover of the UK chocolate maker, the new rules do not constitute a ‘Cadbury's Law’ which will protect UK PLC from overseas bidders.
