Takeover panel protects target companies with rule changes

The Takeover Panel, which creates and enforces a Code governing how companies can and cannot be taken over, will change the Code to protect shareholders in companies that become the targets of hostile takeovers.

"The Code Committee has concluded that hostile offerors have, in recent times, been able to obtain a tactical advantage over the offeree company to the detriment of the offeree company and its shareholders," said the Panel in a review of its Code. "In view of this conclusion, the Code Committee intends to bring forward proposals to amend the Code with a view to reducing this tactical advantage and redressing the balance in favour of the offeree company."

Takeover rules were criticised in the aftermath of US firm Kraft's takeover of Cadbury earlier this year. Critics of the deal argued that rules in the UK made it too easy to mount hostile takeovers in the UK.

The Takeover Panel appears to have agreed in part, but has rejected the two most radical measures considered in a consultation process involving industry, unions, academics and investors.

It "almost unanimously" rejected the proposal that a takeover would need the approval of more than '50% plus one' of shareholders because to raise that minimum acceptance condition would conflict with the ordinary majority required for shareholder resolutions in UK company law.

"The Code Committee considers that, if company law were to be amended so as to raise the threshold for the passing of ordinary resolutions, it would be logically consistent for the acceptance condition threshold for offers that are subject to the Code to be conformed with the new ordinary resolution threshold. In the absence of such changes in company law, the Code Committee does not believe that the Code should be so amended," it said.

The Panel also rejected the idea of denying voting rights to people who had acquired shares only once an offer had been made for a company. It said that this "would compromise the principle of ‘one share, one vote’ and significantly impair the economic rights attaching to the shares acquired by offeree company shareholders".

The Panel acknowledged, though, that by announcing an offer and drawing out the period before the offer progresses, a hostile takeover vehicle can destabilise a company it has targeted.

"This can adversely affect the conduct of the offeree company’s business and the offeree company board’s negotiating position with an offeror," it said.

Other measures have emerged that result in an artificial advantage being gained by would-be takeover vehicles, it said.

"There has been an increasing trend for offerors and their advisers to persuade the offeree company board to enter into a comprehensive package of deal protection measures (including agreeing an inducement fee at the maximum permitted level) that is designed to deter competing offerors and, in practice, restricts the ability of the offeree company board to engage with potential competing offerors in a way that is detrimental to the interests of offeree company shareholders," said the Panel.

The Code Committee will make some changes to the Code. Vehicles making an offer for a company will have to be named at the time of the announcement of the offer and they must make a firm offer within four weeks of that date or withdraw.

"The Code Committee believes that amending the Code in this manner would have a number of advantages, including that offeree companies would have more certainty over how long the offer process would last and long periods in which the offeree company is effectively under ‘siege’ from an unsolicited or unwelcome potential offeror would be avoided," said the proposal.

The Panel will also prohibit deal protection measures and inducement fees because they deter other companies from making competing offers for the firm. It will force the disclosure of fees in relation to the offer, including lawyers' fees. The minimum and maximum fees in the result of the deal's success should be published, it said.

The Panel will also demand that more financial information is published about the state of companies making an offer, a demand that previously only applied when an offer was in the form of shares.

It will also demand that companies seeking to mount a takeover publish and stick to plans in relation to the company and its employees.

Chairman of the Code Committee Lindsay Tomlinson stressed that the Committee was keen not to overstep its responsibilities and wanted to leave decisions of substantial policy to the Government.

"The Code is not concerned with the financial or commercial advantages of a takeover or with questions of wider public interest. Nevertheless, it is clear that some rebalancing of the rules is needed to check the evolution of market practice which has run in favour of the offeror," he said. "We will propose proportionate measures to do this, which do not require changes to law or compromise shareholders’ rights.”

“We expect that the measures proposed by the Code Committee will require offerors to be more fully prepared before making an approach and protect offeree companies from the unwelcome advances of ‘virtual bidders’," said Takeover Panel director general Robert Gillespie. "They will also reduce the time period in which recent acquirers of shares can put pressure on an offeree company following an approach.”