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Changes to Takeover Code working well, according to Panel report

Changes to the rules governing company acquisitions, introduced last year to protect shareholders in the event of a hostile takeover, have "operated satisfactorily" according to a report by the Takeover Panel.28 Nov 2012

According to its review (20-page / 55KB PDF) of the changes to the Takeover Code, the Panel "does not intend to propose any immediate changes" to the rules and will instead keep a number of provisions under review.

The Takeover Code governs how companies can and cannot be taken over. The Takeover Panel is the regulatory body which created and enforces the Code. Among the changes to the rules, which came into force last September, is a new 'put up or shut up' (PUSU) deadline, meaning that companies planning a takeover must make a firm offer within 28 days after expressing their interest in a target company. Bidding companies must be identified in the announcement which begins any offer period, while financial information about the bidder and its plans for the bid must also be disclosed. In addition, deal protection measures and inducement fees are now banned other than in certain limited cases, while offer-related fees must be disclosed.

Corporate law expert James Broadhurst of Pinsent Masons, the law firm behind Out-Law.com, said that the review's conclusions were positive.

"The new rules can be challenging but the Code is principles-based, and therefore designed to flex to the markets and circumstances in which it operates," he said. "We can expect to see further evolution of the rules as more deals put them to the test."

"There is a lack of evidence that offeree companies have been 'under siege' in the year gone by - whether that is as a result of the new rules or more a reflection of a generally quiet M&A market is up for debate; but the requirement to name bidders if a bid leaks, whether it is an offeror's fault or not, has led to an absence of protracted bid periods," he said.

According to the report, the number of 'virtual bid' periods involving market rumours, speculation or share price fluctuations had fallen since the new regime came into force, while the number of offer periods that began with a firm offer announcement rose over the same period. The new requirement for the identity of potential bidders to be disclosed had resulted in a decrease in the amount of leaks of such information, while at the same time the Panel did not see any "significant reduction" in activity over the year despite concerns that bidders might be put off from approaching target companies by the disclosure requirements.

The Panel said that the introduction of PUSU periods had successfully allowed target companies to control the period of "uncertainty and disruption" leading up to a formal takeover announcement. Target companies may apply to the Panel for an extension of the deadline where necessary. According to its figures, the Panel extended deadlines following such a request on 15 occasions over the review period. It did not refuse a request for a deadline extension by the board of a target company during this period.

The new general ban on 'deal protection measures', inducement fees and any other arrangements between a bidder and the target company during or immediately before an offer period had also generally achieved its objectives, the report said. The ban was intended to reduce the tactical advantages that bidding companies were able to obtain over target companies. However, the Panel noted several examples of scenarios in which parties and their advisers had used 'cooperation agreements' to go beyond narrow exceptions contained in the revised Code, such as restrictions on the target company's ability to make announcements or communicate with shareholders in relation to the offer, or commitments by the target company not to publish documentation without the bidder's approval.

The Panel also noted that in a number of cases, shareholders of the target company who were also company directors had entered into agreements that went beyond agreements to accept or vote in favour of an offer, contrary to the Code. In some cases these included agreements not to solicit competing offers, to recommend the offer to other shareholders and undertakings to notify the bidder if the director became aware of a possible competing offer.

"The Code Committee continues to believe that it should be permissible for offeree company shareholders who are also offeree company directors to enter into irrevocable commitments to accept an offer (or vote in favour of a scheme of arrangement) with an offeror," the report said. "However ... such agreements, commitments and undertakings relate to matters undertaken not solely in their capacity as offeree company shareholders but also in their capacity as offeree company directors (and therefore as persons acting in concert with the offeree company)."

Broadhurst said that the nature of the Panel's views on these arrangements showed that it "remains undeterred to protect the interests of target companies and their shareholders".

The Panel noted a "general improvement" in the quality of bidding companies' disclosures in relation to the future of a target company's employees in accordance with the new rules. However, it noted that some of these had not been specific enough or instead referred to their need to "undertake a review of the offeee company's business" following completion of the takeover. It reiterated that general statements were "unlikely to be acceptable" where a bidding company had had the opportunity to fully consider its plans for the target company, and that if mass redundancies or similar actions took place after the takeover without disclosure beforehand this could be a "serious breach" of the Code.