Changes to UK Takeover Code?
Earlier this year, in June, the UK Panel on takeover and mergers had commenced a review the results of which it published just about a week ago. Now this has to do with potential changes to the UK Takeover Code. In an exclusive interview with CNBC-TV18's Menaka Doshi, Charlie Jacobs, Partner at Linklaters help better understand what some of those potential changes could be and how they could impact the area of hostile takeovers.
Below is a verbatim transcript of the interview. Also watch the accompanying video.
Q: Can you give us a sense of why this review needed to take place, what the background to the review is and what the Takeover panel was hoping to achieve through this review?
A: Earlier in the year Kraft from the US did a hostile bid for Cadbury, one of the UKís confectionery companies and it was a fairly emotional takeover and at the end of that takeover, you had these various politicians and lobby groups saying it is becoming all too easy for foreign companies to come in and buy the UK companies and that the landscape will become too tilted towards hostile bidders and should the takeover code look at its rules and decide whether some fundamental changes were needed to the rule book to change landscape for hostile takeovers in the UK. And thatís really the backdrop of the review.
Q: If I understand correctly, as of now, these are still just panel recommendations and they havenít yet become regulations or law so to speak so the compliance need not start right now?
A: Correct, the panel has expressed its views on the basis of an extensive consultation where they had over 97 responses with people giving views. Itís now come out with its views on that and we wait to see the published proposals with the details of what they have actually put in. They will probably take a few more soundings and then consider amending the rule book.
Q: Let me get to the substance of this conversation, the recommendations seem to range from things like, for instance, no break fees in transactions here onwards all the way to a change in the way boards recommend offers, the recommendations need not only be based on price. Take us through what you consider the key changes will be and in the rank of priority or importance as you consider then?
A: There is a raft of proposals but you can broadly put them down into four categories. The first is, and this is all tilting the landscape a bit more back in the favor of a target company under siege, or the bidder in a hostile takeover. So the first category of changes is a target company should not be under siege for too long a period of time and they would like to shorten the period under which a company can be under attack. And therefore they proposed that as soon as a bidder's name becomes public, that bidder must put up or shut up within a four week period. So you got to move quicker; that is the first proposal.
Q: What was the earlier period that applies to put up and shut up?
A: There was a longer period Ė after the target company actually go to the panel and apply for it. So you could well have got a company going for six-seven-eight weeks as opposed to the shorter period, so it could be double that.
Q: The second important issue that you pointed out to me was the fact that they proposed to do away with all break fees altogether?
A: Correct and again here the panel was concerned that when a hostile bidder approached a target company and then finally got to a stage where there was a takeover on the table. With bidders in the target company putting in so many protections in place, it was becoming very difficult for a competing bidder to ever come in, there were a big break fee payable if a competing bidder came in and often there is also matching rights given to the initial bidder. So even if the competing bidder came in, the original bidder could match the bid and still win, which I think putting off competing bidder. So the panel has come out on that quite strongly and said we think people are overegging it and doing too much in the document. We want competing bidders to have the ability to come in and therefore we donít want any of these types of protections and you can see the logic to it. But there some sort of bidders that are going to find this harder. In particular, private equity, where private equity often is the first mover, it is willing to move first but it does want to know that if he gets stumped by another private equity house or another bidder it can at least get its cost reimbursed for that first move. And now the private equity house will be at risk of not been able to recover those costs which has to deter some private equity houses from making bids.
Q: In several deals there is also an exclusivity period- liken that to the break fee, can one assume that the exclusivity period between the two transacting parties will now no longer be available?
A: I think in a friendly deal, where exclusivity is typically given, I think it is upto a company to say to a counterparty they are dealing with, I will give you a period of exclusivity but what they cannot do now is boiler-plate that the way they used to boiler-plate these and say if someone else comes in and ruins the party, you get your fees reimbursed and a break fee.
Q: What makes the exclusivity period binding on the target so to speak because if there is no break fee available to the potential acquirer, the target could go around asking or meeting with several suitors?
A: It is a good question, as I said you cannot boiler-plate it but you could still have a contractual arrangement saying I am going to give you a period of exclusivity in a recommended deal and the panel is less concerned with recommended takeovers where there are two consensual parties discussing at transaction, what they donít like is the hostile takeover and in that type of deal you never have exclusivity because the target company simply wouldnít give it to the hostile bidder.
Q: Let me move on to the other recommendation made by the panel and this one is, like you pointed out, a raft of additional disclosures including the details of the advisory fees that are paid to various advisors, merchant bankers etc. Is this going to be more onerous so to speak or this seems like a reasonably mild requirement here onwards?
A: Agreed. You are exactly right, this third category is additional disclosures and I think it breaks into two areas, one is the additional disclosure of fees and not in aggregate but for each advisor on the transaction which will create some interest in journalists and other types of people following deals to say what are these bankers, what are these lawyers, what are these PR people getting paid and getting a bit more visibility on that. So I think that will attract journalist interest. I think the additional disclosure is a good thing in the areas it is covering which is typically saying they want bidders to have to give more details about what they are going to do with a company when they take it over and in particular in the context of Kraft and Cadbury they are saying, we want them to say what they are going to do with their employees, what they are going to do with the factories, premises and assets. So what they donít want is the bidder making promises and then shortly after the bid being seen to renege on those promises so by having to include more in the offer documents, it is going to make sure that the bidder is played by some tighter rules and should give more protection for the target company post the takeover.
Q: Are some of the requirements for additional disclosures with regards to the terms of financing and the financing arrangements any more onerous as proposed by this panel in comparison to what exists right now?
A: There is more disclosure again, as you said that if you think in the UK again we have had quite a lot of takeovers of football clubs and some of the people have questioned who these bidders are coming in and bidding for the Premiership clubs. And I think by requiring these companies to have more disclosure about their financing, again it will help to give people more comfort on the financial backing of that entity before deciding whether to accept a bid or not. So again I think that those changes are welcome and they apply whether it is a paper bid, where you have always had lot to disclosure over a cash bid when the positive view give you cash confirmation but maybe not too much more detail on whether the funding was coming from.
Q: I know you have ranked this as the fourth most important point but to me it is amongst the most interesting, the fact that currently in takeovers, the board of the target company, has to recommend an offer and that recommendation has usually been based on the highest price amongst competing offers but the panel seems to recommend that here onwards, target boards may and I quote, ďtake more accounts of the position of persons who are affected by takeovers in addition to offeree company shareholders. So the panel saying go beyond shareholders and look at the interest of employees, look at the interest of maybe the nation before you recommend an offer to the shareholders, what are the implications of that?
A: I think these are to be welcomed because if you put yourself in a position of a director of a target company and a good price is tabled, I think often the director felt that would be a all encompassing factor and that director might get criticized by shareholders if he didnít recommend the transaction simply a as result to bringing good price. I think directors will find it useful now to say price is not everything as you have correctly stated and I can take into account other stakeholders, another interest such as employees and the biddersí intentions in deciding whether to recommend the bid or not. So I think that is a very helpful development.
Q: Did you say that this was a welcome move?
A: Yes, I did because looking at it from these changes helping a target company under siege and a director feeling maybe pressured to recommend a bid simply because the price was good, I think this gives him some other grounds to look at and so I am going to consider before deciding whether to give my recommendation or not as part of the board of the target company.
Q: I am going to read out a portion of a Wachtell Lipton note on this set of recommendations and interestingly they donít share your view because they are asking the question, "...whether these fundamental changes on outlook and orientation in the UK will herald an era in which hostile takeovers become more difficult in which greater difference is given to non-shareholder interest and constituencies including state interest in preventing or limiting cross-border change in controlled transactions and transactions that are perceived to have a material impact on domestic employment of product markets." Do you think that these recommendations go a long way in maybe supporting the cause of protectionism if boards are going to look at issues such as employment or national interest before recommending an offer?
A: No, I think the UK has always been an open market and if you compare that with some of the other markets, it is open for business and if people put a good offer on table, bids go through. We are not like Canada with a lot of protectionism, UK is an open market and the panel is not looking to stop UK companies for being taken over. What they are looking to do is to tweak the rules just to make sure that there is a balanced landscape and this is just one of the areas where they are saying price isnít everything and you should take into account other factors. And I think with all directors' duty is now, directors are tending to look at stakeholders interest, communities more than they have in the past and I think that is to be welcomed but it is not going to stop takeovers from going through.
Q: I guess you are also taking heart from the fact that several key proposals that were expected to become part of this recommendation list have in fact not been adopted. The two that you pointed out to me: disenfranchising shareholders or shares that were acquired during or in a window proceeding the offer period, and raising the acceptance conditions threshold above 50% plus. Take us through why these were expected to be part of the list of this recommendations and what the implications are of the fact that they are not?
A: These were some of the more extreme recommendations proposed after Cadbury-Kraft. There was a feeling that in the Cadbury-Kraft takeover, suddenly the shares changed hands in the offer period, that the future of Cadbury was being decided on by hedge funds who bought in for a quick turn on the shares and wouldnít it be easy to just sterilize the market and take their votes away. The panel looked at that and felt that was going too far. The UK has the concept of one share one voice. And to simply go ahead and just disenfranchising shareholders was felt to be changing the basis of UK company law and would not be consistent with what people expect in buying a share in a UK company. So that was rejected.
And again raising the minimum acceptance condition above 50%, again was felt to go too far and inconsistent with UK company law. 50% is a key threshold in our Companies Act. You get a 50%, you can change a board. You can pass a resolution at a general meeting and that would not be possible to change that to a higher threshold without actually making fundamental changes to UK company law. So neither of these were recommended and the vast majority of the 97 consultations that the panel received said that the market was rejecting those two proposals.
Q: I guess it would be really difficult to be able to identify shares that were bought in the offer period but are unlikely to be held beyond the takeover completion so how do you identify short-term shareholders from long-term shareholders and therefore disenfranchise those you believe are short-term and allow those who are long term to in fact vote on those offers Ė that, is I guess the key difficulty in being able to push that through and maybe likely why the takeover panel decided not to recommend it.
A: Exactly. There is a whole lot of practical difficulty in doing this and also the principle that actually UK Company Act does allow one vote for one share and simply putting this disenfranchisement would be inconsistent with our free market and how we operate.
Q: I know you answered this partially already what kind of impact does this have for the M&A space within the UK: how do companies that maybe looking at potential targets in the UK need to now tread as they approach those targets? Does it substantially change the landscapeĖ will it make hostile takeovers more difficult what is your final take from these recommendations and will they definitely become regulations as they stand today or do you believe there could be some more tweaking?
A: Firstly I would say that we are still waiting for the detail. I would say broad brush, this isnít a violent revolution. It has looked to change its rules in the four broad areas that we have spoken about. Then you have a recommended takeover, which the vast majority takeovers are. This wonít have a huge impact on those takeovers where you have a hostile bid and thinking about making a hostile approach to target. I think there are some changes that they will need to be careful and in particular there is ready to go within four weeks.
I think it will encourage bidders to really look after secrecy of their bid because they do not want their name coming out and that might mean a return to less leaky deals in the market which I think is a good thing and welcomed. But it will make it hard for some bidders- already mentioned private equity in the beginning of the interview- there will have to be some good consultation with private equity to just make sure that the balance of these proposal aren't going to make it too difficult for leveraged buyouts and private equity buyouts in doing takeovers and all that again. The vast majority of private equity deals tend to be recommended deals and not hostile. So I think change is going to be needed to help people approach hostile bids. It might put a few people off but generally, this is just a change to some of the ground rules that I donít think will result in a fundamental change and I canít see it being a case of UK Plc not being longer available to be acquired. UK is still open for takeovers and this is a tweak to the rules.