Takeover Code amendments: what you need to know and how the new rules will change the takeover process in practice

In the November edition of our Public Company Update we reported on consultation paper PCP 2017/2 which outlined a number of proposed amendments to the Takeover Code (the Code).  Earlier this year the Code Committee (Committee) of the Panel published its response statement (RS2017/2) and the new provisions came into effect on 8 January.  In this article we highlight what you need to know and explain how the new rules will change the takeover process in practice.

Content of rule 2.7 firm offer announcement 

When making a Rule 2.7 firm offer announcement, an offeror must now explain its intentions with regard to the business, employees and pension schemes of the offeree company. Under the terms of the new note 1, this means its intentions with regard to:

• the future business of the offeree company, including its intention for any research and development functions;
• the continued employment of the employees and management of the offeree company and of its subsidiaries, including any material change in conditions of employment or in the balance of the skills and functions of the employees and management;
• its strategic plans for the offeree company, and their likely repercussions on employment and on locations of the offeree company’s places of business, including on the location of the offeree company’s headquarters and headquarters’ functions;
• employer contributions into the offeree company’s pension scheme(s) (including with regard to current arrangements for the funding of any scheme deficit), the accrual of benefits for existing members, and the admission of new members;
• any redeployment of the fixed assets of the offeree company; and
• the maintenance of any existing trading facilities for the relevant securities of the offeree company.

In addition, where the offeror is a company, and insofar as it is affected by the offer, the offeror must also state its intentions with regard to its future business and set out its intentions with regard to itself in relation to the second and third bullet points above.

If the offeror has no intention to make any changes in relation to the matters described above, or if it considers that its strategic plans for the offeree company will have no repercussions on employment or the location of the offeree company’s places of business, it must make a statement to that effect. 

It should be noted that in the response statement the Committee confirmed that these statements of intention would not need to appear in possible offer announcements.  Rather, they just need to appear in Rule 2.7 announcements and subsequently in the offer documents relating to the deal.

Will the new provisions increase costs and mean more due diligence in practice? In our view, yes, because the new provisions will drive more medium to long term business planning to be brought up front, which will typically mean more due diligence. Deeper “private company sale” style due diligence can be contentious in the context of a public M&A deal and will certainly create timing pressures where a “put-up or shut-up” deadline is in place. 

The Committee confirmed that statements to the effect that an offeror may wish to undertake a review of the offeree company’s business following completion will not of itself satisfy the requirements.  Instead, the Committee considers that in such circumstances an offeror should disclose what the review is likely to cover and its expectations in relation to the review.

Code Timetable

In a change to the long-standing Code timetable, there is now a general prohibition on offerors publishing their offer document within 14 days following the Rule 2.7 firm offer announcement.  This is designed to further help ensure that employee representatives and pension scheme trustees have sufficient time to consider and give their views on the effects of an offer.

It should be noted that an offeree company can consent to the earlier publication of the offer document. On the technical question of how that consent should be given, and whether, indeed, offeree boards will be prohibited under Rule 21.2 from granting consent, the Committee has stated that it would be permissible for a firm offer announcement made jointly by an offeror and the board of the offeree company to include a statement that the board had provided its consent to the publication of the offer document. The offeror would then be able to rely on this statement for the purposes of the amended Rule 24.1(a).  The Committee confirmed that if there was any “bid conduct agreement” or similar agreement, it would not be permissible to include consent within this particular type of document.

At the same time as the offer document is published, it must be made readily available to employee representatives (or where there are no representatives to the employees themselves) and to the trustees of the offeree’s pension scheme(s).

Offeree company boards now have 14 days from publication of the offer document to publish their response circular. This too must be made readily available to the employee representatives (or where there are no representatives to the employees themselves) and to the trustees of the offeree’s pension scheme(s).

One notable knock-on effect of the timetable change may be to reduce an offeror’s ability to build a stake in the shares of an offeree company given that any shares acquired prior to the offer document having been published would not count for “squeeze-out” purposes. The Committee considered this potential negative effect to be outweighed by the overall benefits of the new rules.

The practical effect of the timetable change is that where an offeree board withholds its consent to the publication of the offer document it would have at least 28 days from the date of the offeror’s firm offer announcement until it had to publish its initial circular which would give it more time than the current minimum of 14 days in the case of a hostile offer. 

Annual reports and publicity

The reporting requirements that have for a while now enabled the Panel to monitor compliance with post-offer undertakings is extended under the new rules to post-offer intention statements. Specifically, a party to an offer which has made a post-offer intention statement must, at the end of the period of 12 months from the date on which the offer period ended, or such other period of time as was specified in the statement, confirm in writing to the Panel whether it has taken or not taken the course of action it stated it intended to take or not to take.

Furthermore, that statement must be published via a RIS. The same now goes for reporting statements relating to post-offer undertakings. One respondent expressed reservations during the consultation as to whether it would be possible to redact commercially sensitive information and the Panel confirmed that on the basis that the Rule requires any report to the Panel to be published “in whole or in part (as required by the Panel)” there was scope for the Panel to require any parts of report to be published and consent to the redaction of other parts prior to its publication.

For more information, please contact Mark Howard.