Cadbury's Law: Bridging the Gap
Sarah Jane Leake | Bloomberg Law
Over the past year, the bulk of the Code Committee’s1 work has been focused on reviewing certain aspects of takeover regulation in the UK. This review was sparked by the heated debate arising out of Kraft’s controversial takeover of Cadbury last February.
Call for Change
Kraft’s takeover of Cadbury, an iconic standalone British company dating back some 200 years, caused considerable controversy. To cite Roger Carr, former Cadbury chairman who resigned when the company was bought by Kraft, the takeover “enraged a portion of the British public, ignited politicians, distressed employees [and] amply rewarded shareholders.”2
It is common for some European countries, in particular those on the continent, to block or threaten to intervene in takeovers so as to protect domestic companies. Critics of the UK’s open market policy vehemently argued that similar measures should be introduced in the UK. These ideas were backed by Unite, the UK’s largest trade union, which termed the proposal “Cadbury’s Law.”
In response to social and political pressure, the Code Committee agreed to review the City Code’s provisions on hostile takeovers. As a first step, last June it published a number of proposals for change.3 Rather than putting forward specific proposals for change, the Code Committee deviated from usual practice. It instead sought to provide a forum within which suggestions for change could be discussed and debated. The size of the response was unprecedented. The consultation received some 97 responses from a wide array of stakeholders across the spectrum.
In view of feedback received, the Code Committee concluded that there was indeed a clear case for change. There was sufficient evidence to suggest that market practice has evolved such that hostile offerors are able to acquire a tactical advantage over the target to the detriment of its shareholders and its long-term future.
In its formal response, published in October,4 the Code Committee undertook to bring forward proposals to amend the City Code with a view to reducing this tactical advantage and redressing the balance of power in favour of the target company. In addition, it concluded that a number of other changes should be proposed to improve the general offer process and to take account of the position of those affected by takeovers. Detailed proposals were published earlier this year.5 Primarily, they seek to:
- Provide greater protection for target companies during protracted virtual bid periods;
- Strengthen the position of the target company by outlawing deal protection measures and inducement fees other than in certain limited circumstances;
- Enhance transparency; and
- Provide more recognition to the interests of the employees of the target company.
The consultation closed for comment some two months ago. On 1 July, the Code Committee published a guidance statement regarding the implementation and publication of amendments to the City Code, together with transitional arrangements.6 However, since the Code Committee had not at that time completed its detailed consideration of all feedback received, and had therefore not made a decision as to the final text of the amendments, its guidance note was drafted on the basis that the changes suggested would be implemented as proposed.
After some 18 months of heated debate, the Code Committee has now published the final changes to be made to the City Code.7 Despite intense lobbying from a number of stakeholders, the Code Committee has not made any substantial changes to the proposals it consulted on earlier this year. Alongside this, the Code Committee has also published Instrument 2011/2, which formally makes the relevant changes to the Code. The amendments will come into force on Monday 19 September 2011 (Implementation Date), when a new, revised and consolidated version of the Code will be published.
— Virtual Bids
Controversially, under the new regime:
- An announcement made by the target about a potential bidder which starts the offer period must identify that bidder, together with any other potential bidder with which it is in talks or from which an approach has been made (and not rejected);
- Where, during an offer period, rumour and speculation correctly identify a potential offeror which has not previously been identified, the target company or the potential bidder must make an announcement identifying that offeror;8 and
- Once a potential bidder has been identified, it has 28 days in which to announce either a firm intention to bid or that it is not going to make a bid9 (PUSU Options).
These changes seek to protect target companies against protracted virtual bid periods.
According to the Panel, approximately two-thirds of respondents were opposed to these changes. In particular, they argued that 28 days would be too short a timeframe to complete the steps necessary to announce a firm intention to make an offer. While an offer does not need to be made at the 28 day stage, due diligence will need to have been completed and financing secured. The Code Committee considers that these concerns are overstated. In its view, potential offerors can mitigate against this risk by ensuring that they are well-advanced in their offer preparations before making an initial approach. Further, it emphasises that the PUSU deadline will only start running from the day on which the identity of a potential bidder is announced which, typically, is not the date of approach.
— Deal Protection Measures
Considering deal protection measures detrimental to the target’s shareholders, the Code Committee proposed prohibiting such arrangements. This proposal received overwhelming support.
Subject to a limited number of exceptions,10 offer-related arrangements between the offeror and the target will be prohibited during an offer period or when an offer is reasonably in contemplation. This includes all deal-protection measures, break fees, work-fee arrangements and implementation agreements. It will also include any other arrangements or agreements entered into between the parties in connection with an offer (e.g., asset sale).
The major exception will be for a “white knight.”11 Target companies will be allowed to enter into an inducement fee arrangement (but no other deal protection measures) with the white knight when it announces a firm intention to make a recommended offer. Going further than the Code Committee’s initial proposals, the new rules will now allow a target company to give an inducement fee to more than one while knight, but only on the condition that: 1) the aggregate amount of the inducement fee that may be payable by the target is no more than 1 percent of the first competing offer; and, 2) the fee is payable only when an offer becomes unconditional.
— Opinion on Offer
The revised Code will clarify that there is no limit on the factors that the target board may take into consideration when giving its opinion on an offer. Furthermore, it will expressly stipulate that price need not be regarded as the determining factor.
— Disclosing Advisers’ Fees
Under the new regime, the offer document must contain an estimate of the aggregate fees and expenses expected to be incurred in connection with the offer, with financing fees disclosed separately from advisory fees. These must be broken down by category of adviser).
Where the fees and expenses actually paid within a particular category exceed the amount publicly disclosed as the estimated maximum by 10 percent or more, the offeror will be required to notify the Panel and seek its advice as to whether an announcement would be appropriate.
— Bid Financing & Financial Information
The revised City Code will contain enhanced disclosure requirements concerning bid financing and financial information.
Previously, the Code Committee was of the view that the financial condition of the offeror and details of the financing of the offer were only relevant in the case of a securities-exchange or where the target company’s shareholders could become minority shareholders. Now, however, it considers that a wider range of parties, especially employees, are interested in, and should have access to, this information.
From the Implementation Date, bidders will be required to disclose more information on how the offer is to be financed, including repayment terms, interest rates and key covenants. All documents should be made publicly available, without redaction, on a website by noon on the next business after the announcement of a firm intention to make an offer. To facilitate competition, bidders will not, however, be asked to disclose any headroom secured in a financing arrangement for revising their offer.
More detailed information will also have to be disclosed on all offers, regardless of whether they are in cash or securities. Furthermore, bidders will be required to disclose the summary details of any ratings provided by ratings agencies and any changes to these during the offer period.
Bringing the City Code more in line with the provisions of the Prospectus Rules (PR), bidders on a securities-exchange offer will also be required to confirm that there has been no material change in its financing or trading position since the date of its last audited accounts or interim statement, or provide an appropriate negative statement.
— The Target & Employees
The Code Committee is introducing a number of new provisions to improve the quality of disclosure by bidders and targets of the bidder’s intentions concerning the target’s employees. The impetus for change in this area arose out of the substantial criticism levelled at Kraft for closing Cadbury’s Somerdale factory shortly after the takeover, despite previously promising to continue operating this facility.
Under the new regime, bidders will be required to disclose their intentions regarding the target’s employees, locations of business, fixed assets, and existing trading facilities for securities (e.g., whether it intends to delist listed securities). Where there is no intention to make any changes in relation to these matters, the bidder must expressly declare this fact.
In addition, where either party makes a public statement of intention relating to any course of action it intends to take, or not take, after the offer period, it will be committed to that course of action for at least 12 months from the day on which the offer becomes unconditional (or for such time as is expressly agreed between the parties), save for where there is a material change in circumstances.
— Employee Representatives
Currently, information about an offer is only required to be given to employees or employee representatives at the time a firm intention to make an offer is announced.
To strengthen the position of employees in a takeover situation, the revised Code seeks to ensure that they receive information about an offer at an earlier stage in the process.
To this end, the new rules provide that employees (or their representatives12) are entitled to be provided with copies of any announcement that starts an offer period and must be expressly informed of their representatives’ right to have their opinion appended to the offeree board’s circular. The target company will be obliged to cover any costs reasonably incurred by the representatives in seeking advice to verify the information set out in their opinion. Where an opinion is not received in time to be included in the circular, the target will be required to publish that opinion on a website and announce via a regulatory news service (RNS) that it has done so.
The final implementation and transitional arrangements follow those proposed by the Code Committee last month.13 Particular caution should be given where an offer period straddles the Implementation Date. Where a target company is already in an offer period, it must, by 5pm that day, announce the identity of any potential offeror with which it is in talks or from which it has received an offer. Further, any potential offeror identified in an announcement made on or before the Implementation Date must, by 5pm on 17 October 2011, comply with one of the PUSU Options.
Given the significance of the changes, the Code Committee plans to review the operation of the amendments within 12 months of the Implementation Date, subject to the level of bid activity during forthcoming months.
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