Proposed new rules for takeovers
The Takeover Panel is trying to give boards more tools to defend against hostile takeovers. The last few months have been spent seeking feedback on proposed changes to the Takeover Code, which governs the acquisition process for public companies in the UK. The Panel's preliminary report has focused on whether shareholders in a target company have sufficient protection against hostile takeovers. The consultation process is not at an end yet and further papers will be released in due course, which will ultimately set out in detail the proposed changes to the Takeover Code.
At the current time, the main findings are as follows:
- Acquirers should make their intentions clear much earlier. Specifically, they should state their plans within 28 days of revealing that they are considering a bid.
- Offer documents for cash bids should be dispatched more quickly.
- The financial position of the acquirer and its intentions towards the target will have to be published.
- Fees payable to advising parties will also have to be published.
- Break fees will be banned, as the Panel believes that these deter potential competing offers.
- Recommended schemes of arrangement will be completed according to a clear timetable.
- Employees will have more opportunity to state their views, although it is unclear exactly how this will work in practice.
The Panel rejected the idea of changing the '50% plus one vote' as the measure of success, stating it was incompatible with company law. The Panel also failed to endorse the idea of disadvantaging short-term shareholders to the benefit of long-term ones, concluding that this would compromise the principle of one share one vote.
As a result of the proposals, it is expected that there will be a change in the way takeover activity is conducted because bidders will have to be more prepared to make the bid before an announcement is made to the market. The aim here is to limit the damage to a target's day to day business due to a protracted bid process.
The requirement to publish deal-related fees in advance will shed light on what lawyers, accountants and investment bankers are making out of a deal - food for thought for professional advisers.
The proposed abolition of break fees is perhaps the most controversial proposal. The majority of respondents backed the Panel's current approach, including the permitting of a break fee of up to 1% of the offer price. A break fee is paid to the original bidder if the target accepts a rival offer. It provides an element of insurance to the first bidder if the deal does not proceed, as the break fee covers some of the costs incurred by the bidder in putting the offer together. Scrapping break fees could discourage lazy boards of directors from simply recommending the first bid, even if it is a poor one, and then hiding behind a break fee clause to deter other bidders.
We shall certainly watch with interest how the Panel develops its proposals over the coming months.
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