The new takeovers regime 2

The UK takeovers regime has been changed to comply with European law and, at the same time, to reflect recent consultations by the Takeover Panel. The EU Takeovers 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). Because the Directive is based on the UK model, radical changes to the UK regime were not required.

The Directive requires member states to observe certain ‘minimum standards’, leaving them free to impose more detailed rules if they choose. Most of the UK Takeover Code is more detailed than the Directive requires, leaving only modest changes to be made. 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.

Jurisdiction

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

The changes have extended the Takeover Panel’s jurisdiction to include, for example, all offers for companies and European companies (SEs):

• whose registered offices are in the UK, the Channel Islands or the Isle of Man, and
• any of whose 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 regulated by the Takeover Panel are subject to the same Code Rules. However, where the bid is for an EU-incorporated company whose shares are traded on an EU regulated market:

• the Panel has been given additional powers to enforce Code Rules which implement or reflect the Directive (whether they were introduced or amended on implementation, or already existed). 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 Code’s contents requirements. Although offer documents and defence circulars are likely to be prepared and verified in the same way as before, investment banks may drop the practice of making offers on behalf of their bidder clients
• there are minor changes to the squeeze-out procedure. Where the target has overseas shareholders with no registered address in the UK, bidders are wary of breaching local securities laws when they send the offer document overseas. The change allows bidders to extend the offer to overseas shareholders 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 starting the squeeze-out procedure, although in practice the bidder will be keen to acquire 100% of the target as soon as possible

Disclosure in annual directors’ report

New disclosure rules apply to UK companies whose securities carry voting rights and are admitted to trading on an EU regulated market at any financial year end beginning on or after 20 May 2006. The rules require the directors’ report 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. This includes:

• rights and obligations attaching to each class of shares, including restrictions on voting rights
• 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
• any significant agreements to which the company is party that take effect, alter or terminate on 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 is itself 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.

Special deals

Target shareholders must now always be given the opportunity to vote at an extraordinary general meeting on any favourable conditions in an offer that are extended to some shareholders only (such as target management in an MBO who will be shareholders in the bid vehicle). 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 when employees or their representatives are informed (through the channels normally used by the company for staff communications) of the existence of the 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 with 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. It must also set out the locations of the offeree company’s places of business and its proposals to make any material change in the target employees’ conditions of employment. 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 the offer. This must be appended to the offer document or defence circular (as appropriate) as long as it is received in good time before publication.

Except where the target is obliged to consult its employees under the Information and Consultation of Employees Regulations 2004, target employees will have no time to submit their opinion on 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. 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.

Substantial acquisitions rules

The Panel has abolished the substantial acquisitions rules. This means it is now possible to carry out a market raid before announcing an offer or possible offer and acquire up to 29.9% of a company in one go. This makes it 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 was expected to tell BAA that it would make an offer trumping an existing bid by Ferrovial, Citigroup (Ferrovial’s bankers) managed to buy up nearly 13% of BAA’s shares in the market, taking its 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, 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 from a price rise in the underlying security. However, derivatives and options will not count towards a bidder’s acceptance condition under Rule 10.

This approach recognises 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.

Under the control provisions, the Panel will not normally permit short positions to be offset against long positions. This is because a person with a long position will not diminish his control over shares held by the counterparty by entering into a short position with a different counterparty, even if doing so flattens his economic exposure.