The new takeovers regime 1

The UK takeovers regime has been overhauled and there is a new Takeover Code. Although the fundamentals of Code-regulated bids are unchanged, in certain practical ways UK takeover practice will now be different. This article highlights some of the more important new rules.

The recent changes to the Takeovers regime have resulted from the implementation of the EU Takeovers Directive and the introduction of various unrelated amendments stemming from various Panel consultations. As well as changes to the Code, those aspects of the Directive that need a statutory basis have been introduced by means of the Takeovers Directive (Interim Implementation) Regulations 2006, which will be replaced when the Company Law Reform Bill comes into force.

Takeovers Directive

The Directive is intended to harmonise more closely the rules on conventional takeovers of EU-incorporated companies whose shares are traded on an EU regulated market (which, in the UK, means listed, but not AIM or OFEX, companies). Broadly, the Directive’s rules are based on the UK model, so radical changes to the UK regime were not required. It is a “minimum standards” Directive: in other words, it requires member states to put in place certain basic rules in relation to takeovers but leaves them free to impose additional and more detailed rules. Most of the existing Rules that went beyond the Directive have been left intact, but in certain areas the UK regime has been modified to bring it into line with the Directive.

Jurisdiction

When a takeover is proposed, advisers will need to ascertain early on which regulator(s) will have jurisdiction over the bid. Often, the bid will be governed exclusively by one set of national rules – in the UK, this would mean principally the Takeover Code and the legislation governing the squeeze-out procedure – but in some circumstances jurisdiction may be shared between national regulators.

Implementation of the Directive has altered the scope of the Panel’s jurisdiction so that, for example, the Code now additionally applies to all offers for companies and European Companies (SEs) that have their registered office in the UK, the Channel Islands or the Isle of Man if any of their securities are admitted to trading on a regulated market in the UK or on a stock exchange in the Channel Islands or the Isle of Man.

Directive-regulated bids

All bids that are regulated by the Panel are subject to the same Code Rules. However, a Directive-regulated bid (where the bid is for an EU incorporated company whose shares are traded on an EU regulated market) differs from other bids in three main respects:

• Code Rules that implement or reflect the Directive (whether they were introduced or amended on implementation, or already existed) have been put onto a statutory footing and the Panel has been given additional powers to enforce them. In particular, the Panel can now apply to court to enforce any of these Rules, and can compel any person to provide it with copies of any document or other information that relates to a Directive regulated bid.
• It is a criminal offence for the offer document or defence circular not to comply with the contents requirements set out in the Code. Although offer documents and defence circulars are likely to be prepared and verified in the same way as before, some investment banks are being urged by their advisers to drop the practice of making offers on behalf of their bidder clients.
• Instead of Part 13A of the Companies Act (and pending the coming into force of the Company Law Reform Bill, which contains equivalent provisions), the squeeze-out procedure in Schedule 2 to the 2006 Regulations applies.

The Schedule 2 rules are closely based on Part 13A, but, where the target has overseas shareholders with no registered address in the UK, and the bidder is concerned that sending the offer document overseas might breach local securities laws, it can extend the offer to them by placing a notice in the London Gazette and ensuring that the offer document is available for inspection at a place in an EEA state or on a website. Also, instead of having to serve notice to start the squeeze-out within two months of reaching the 90% threshold, the notice must be served within three months of the last day on which the offer can be accepted. Since the Code allows a bidder to leave its offer open for many months, or even indefinitely, this rule appears to impose no real deadline for the squeeze out procedure to be initiated. Usually, though, the bidder will be keen to acquire 100% of the target as soon as possible.

Disclosure in annual directors’ report

For financial years beginning on or after 20 May 2006, where a UK company has securities carrying voting rights admitted to trading on an EU regulated market at the end of that year, its directors’ report will have to include certain information about its share structure, the rights attaching to its shares, and any rules or arrangements that could affect the success of a takeover bid.

For example, details will have to be given of:

• the rights and obligations attaching to each class of shares, including any restrictions on voting rights;
• any restrictions on the transfer of securities;
• each person with a significant direct or indirect holding of securities in the company, including any person who holds securities carrying special voting rights in the company; and
• any significant agreements to which the company is a party that take effect, alter or terminate upon a change of control of the company following a takeover bid. Although this sounds onerous, disclosure is only required of agreements to which the listed parent itself is a party – it does not catch agreements entered into by subsidiaries. In practice, few such agreements are likely to exist. Even where they do, it may be possible to avoid disclosure on the grounds that disclosure would be “seriously prejudicial” to the company (although this is probably a difficult test to satisfy).

Changes reflecting the Directive but applicable to all companies and bids

Special deals

Where an offer involves a special deal with favourable conditions for some shareholders (such as target management in an MBO who will be shareholders in the bid vehicle), target shareholders must now always be given the opportunity to vote on the arrangements at an extraordinary general meeting. Previously, an EGM was normally only required if the bidder and target management between them held more than 5% of the target’s equity shares. The meeting will need to be factored into the timetable.

Where the bidder proposes any other arrangements to incentivise the target’s management, the target’s Rule 3 adviser must confirm publicly that, in its opinion, such arrangements are fair and reasonable.

Effect of the offer on target employees

Both the bidder and target must make the offer document available to their respective employees as soon as it is posted. The Panel has indicated that it will consider a document to have been made available if employees or their representatives are informed – through the channels normally used by the company for staff communications – of the existence of the relevant announcement or document and of where and how they can access it. For many companies, this will probably mean notifying employees by means of a general email that contains a hyperlink to the page on the company’s intranet where the offer document is posted.

In the offer document, the bidder must set out “its strategic intentions for the offeree company, and their likely repercussions on employment and the locations of the offeree company’s places of business” and its proposals to make “any material change in the conditions of employment” of target employees. This requirement goes further than the previous Code Rules, and bidders are therefore likely to give more detailed consideration to staff issues before the offer document is posted.

Employee views on the offer

Target employees or their representatives are entitled to submit a written opinion on the implications of an offer and, provided the opinion is received in good time before publication of the offer document or defence circular (as appropriate), the opinion must be appended to it.

In some circumstances, the target may have to consult its employees pursuant to the Information and Consultation of Employees Regulations 2004; but if not, in a recommended offer where the offer document is posted simultaneously with, or very shortly after, the announcement of a firm intention to make an offer, target employees will have no opportunity to submit their opinion in time. Where there is a gap between the announcement and posting of the offer document, or where the offer is hostile, it is probably reasonable for the target to impose a deadline requiring the employees’ opinion to be delivered shortly before the document is due to be bulk-printed. The Code does not restrict the length or content of the opinion: if the target or bidder disagrees with statements made by the employees, it may want to include a riposte in the offer document or defence circular.

Non-Directive changes that affect all companies and bids

SARs

The Panel has abolished the Substantial Acquisitions Rules, so that it is now possible to carry out a market raid before the announcement of an offer or possible offer and acquire up to 29.9% of a company in one go. As a result, it is more difficult for a target and other potential rival bidders to react before a raider has acquired a stake large enough effectively to block any competing offer. The tactic of using a market raid to knock out a rival bidder has already been dramatically illustrated in the recent battle for BAA: on the morning when the Goldman Sachs consortium were expected to tell BAA that they would make an offer trumping an existing bid by Ferrovial, Ferrovial’s bankers, Citigroup, managed to buy up nearly 13% of BAA’s shares in the market, taking their stake to just below 29%, and effectively ending the Goldman Sachs move.

The rules relating to tender offers have been retained as a new Appendix 5 to the Code.

Dealings in long derivatives and options

A large number of technical changes have been made to the Code so that, broadly speaking, all dealings in long derivatives and options are now treated as dealings in the underlying shares. This is particularly relevant for the purposes of Rules 5 (timing restrictions on acquisitions), 6 (purchases resulting in an obligation to offer a minimum level of consideration), 9 (mandatory offers) and 11 (nature of consideration to be offered). Essentially, a person has a long position under a derivative or option if he will benefit if the price of the underlying security rises.

The new approach is intended to recognise the commercial reality that the counterparty to a derivative transaction will almost invariably acquire actual shares to hedge its exposure under the contract. Although there may be no formal or legally binding agreement to do so, the counterparty will usually deal with the hedging shares in a manner that is consistent with the commercial objectives of its client – giving the client at least a measure of de facto control over those shares.

As any control a person has over shares held by the counterparty to a long position will not be diminished by that person entering into a short position with a different counterparty (even if doing so flattens the person’s economic exposure), for the purposes of the control provisions the Panel will not normally permit short positions to be offset against long positions.

As an exception to this general approach, derivatives and options will not count towards a bidder’s acceptance condition under Rule 10.

Further details of these changes, and those relating to the implementation of the Takeovers Directive, can be found on LawNow, our free on-line information service.

This article first appeared in our Clearly corporate bulletin July 2006. To view this publication, please click here to open a new window.