Panel consults on amendments to the Takeover Code

Tom Shaw, Speechly Bircham LLP

28th March 2011

On 21 March 2011, the Code Committee of the Takeover Panel finally published the next stage in the consultation process which began last year following Kraft's controversial £11.4 billion hostile takeover of Cadbury.

The public consultation paper published yesterday by the Code Committee sets out the detailed proposals to implement the wider objectives set out in last October's Response Statement to:

• increase the protection for offeree companies against protracted "virtual bid" periods by requiring potential offerors to clarify their position within a short period of time
• strengthen the position of the offeree company by (i) prohibiting deal protection measures and inducement fees other than in certain limited circumstances and (ii) clarifying that offeree boards are not limited in the factors they may take into account in giving their opinion and recommendation for an offer
• increase transparency and improve the quality of disclosure by (i) requiring the disclosure of offer-related fees and (ii) requiring the disclosure of the same financial information in relation to an offeror and the financing of an offer irrespective of the nature of the offer
• provide greater recognition of the interests of offeree company employees by (i) improving the quality of disclosure by offerors and offeree companies in relation to the offeror's intentions regarding the offeree company and its employees and (ii) improving the ability of employee representatives to make their views known.

The consultation period closes on 27 May 2011, following which a further Response Statement will be published effecting the changes to the Takeover Code. It is therefore likely that the changes to the Takeover Code will become effective over the course of the Summer.

These changes are likely to have a significant impact on the initial stages of the bid process and will require prospective bidders to have carried out significantly more preparatory work before talks are commenced with the Target's board or an approach is made, as under the proposals these steps would trigger the 28 day period within which the bidder would be required to "put up or shut up". The preparatory work would also have to be carried out under strict secrecy, as any leak of the preparations may result in the target having to make an announcement naming the bidder and triggering the "put up or shut up" period before the bidder is ready.

Whilst the changes are likely to mean more preparatory work for the bidder, the restrictions on inducement fees will at the same increase their risks. Under the proposals bidders would not now be able to require the target to pay an inducement fee if, for example, the target board decides to recommend a competing offer. This will further focus the minds of prospective bidders and test their resolve when considering making a bid.

Finally, it is worth noting that the majority of the far reaching proposals which the Code Committee put forward in the first round of consultation last Summer have been dropped. These included suggestions to increase the minimum acceptance threshold and the disenfranchisement of short-term shareholders such as hedge funds. The proposals to extend the recognition of employees' interests have been retained and which can be seen as the only remnant of the changes driven by the Kraft/Cadbury takeover.

This note follows up from Speechly Bircham's Spring 'road-show' workshops for corporate finance advisers in which our legal update gave a progress report on the proposed changes to the Takeover Code.

This article was written by Tom Shaw, Partner at Speechly Bircham and QCA Legal Committee Chairman.

The Quoted Companies Alliance's Legal, Markets & Regulations and Corporate Finance Advisors Committees are examining this paper and will be responding to it. Tony Pullinger, Deputy Director-General of the Takeover Panel, will be attending our Markets & Regulations Committe on 27 April 2011 to discuss the proposals further.

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