The UK Takeover Code – Key Changes 19 September 2011

The City Code on Takeover and Mergers (the "Code") regulates the conduct of UK public takeovers, as well as certain takeovers where there is a shared jurisdiction between the UK and other EEA countries. On Monday 19th September 2011 a revised Code, published by The Panel on Takeover and Mergers (the "Panel"), took effect.

The new rules focus on regulating competing bids and many regard the net effect has been to rebalance the scales in favour of target companies by shifting the market away from speculative bids. The key changes are a prohibition on break or inducement fees, earlier identification of a bidder and an automatic 28 day 'put up or shut up' period for bidders:

• The prohibition on offer-related arrangements – the new Code provisions introduce a total prohibition on inducement fees (including break fees) or other offer-related arrangements except with the consent of the Panel. Fee arrangements entered into prior to 19 September 2011 are not subject to this prohibition.
  
  Panel consent would be provided in the following limited cases only: (i) where a hostile bidder has announced its intention to make an offer, and the target company wishes to enter into an inducement fee arrangement with a white knight; (ii) at the conclusion of an auction process, the target will normally be permitted to enter into an inducement fee arrangement with the winning bidder; and (iii) where the target is in financial difficulties it will be permitted to offer an inducement fee.
  
  Until now break fees (mostly limited to 1% of the net value of the offer) have been fairly standard for recommended takeovers in the UK;

• The requirement to identify a potential bidder – a target company is now required to identify any potential bidder with which it is in talks or from which it has received an approach in any announcement it makes which triggers an offer period. If the target is in talks with other potential bidders at the time of such announcement, it must also name those bidders. There is little doubt that this will mean that negotiation teams will need to exert much greater control over leaks.
  
  Where an offer period is triggered by an announcement made by a potential bidder, the target company is not required to identify any other potential bidder unless rumour and speculation specifically identifies a potential bidder who has not previously been identified;

• An automatic 'put up or shut up' period – any potential bidder must, by no later than 5pm on the 28th day following the date of the announcement in which the bidder was first identified, clarify its intentions (i.e. announce a firm intention to make an offer or announce that it will not make an offer). Otherwise a six month cooling off period will be triggered. This is a short timescale in which to put together a complex or leveraged bid. In the UK where a bid is financed, that financing must be agreed to and committed.
  
  If talks with a subsequent bidder are announced, that bidder has its own 'put up or shut up' period within which it must also make a firm decision. At the request of the target company, the Panel will extend any deadline beyond 28 days (e.g. to synchronise periods for multiple bidders, or to give more time for negotiation). The Panel will only authorise such extension towards the end of the 28 period and with consideration to the status of the negotiations and the expected timetable for their conclusion. But note that the 'put up or shut up' rules are not applicable where a target initiates a formal auction sale process.

There are also other changes which are affected by the revised Code such as the requirement for greater transparency on advisers' fees (including law firms, accountants, PR advisors, etc) and the bidder's arrangements for financing the offer. Some believe that this will exert a downward pressure on fees. Additionally there is an increased recognition of the views of employee representatives' including the requirement to publish the representatives' opinion on the target's website if the deadline for publication in the circular has passed.

The revised rules, particularly the early identification of potential bidders and the more stringent 'put up or shut up' period, are intended to reduce uncertainty for target companies. Historically, bidders have not faced such pressure to make a decision and target companies have found themselves in a position where their wait for a bidder to make a decision has had no long-stop date (because the offer timetable has not been initiated). Such uncertainty can negatively impact the target's business, negotiating position and shareholder base. The new obligation to make a firm statement within 28 days means target companies will not be faced with undecided bidders and protracted bids and instead will give the target companies greater certainty and therefore a stronger bargaining position. But will the quicker pace be at the expense of fewer takeovers?

Potential bidders will need to review their bid tactics in light of these changes: bidders would be advised to prepare well in advance of approaching a target so that they can work within the tighter timeline set – extension beyond four weeks will be at the target's option. Increased confidentiality and possibly smaller transaction teams would also be sensible in order to minimise any possibility of rumour or speculation which could trigger the need to make an announcement.  Given the lack of deal protection for bidders, will there be fewer bids? Will bids be at a lower price (to reflect greater deal risk and the lack of recompense)? Will there be more competitive bids (in the absence of deal protections)? Will hostile bidders be discouraged? Practitioners will be watching this closely.