Takeover rules tighten after Kraft-Cadbury broken promises

Updated rules around UK corporate takeovers will make it harder for hostile bids to succeed, and will provide better protection to targeted companies and their employees.

The Panel on Takeovers and Mergers believes it is too easy for hostile company bids to succeed, and for short-term investors to influence the outcome of a bid.

It believes some bidders have used its rules to “obtain a tactical advantage” over their targets and proposes changes to those rules that seek to “redress the balance in favour of the offeree company”.

After the furore surrounding Kraft’s takeover of Cadbury and the perception that it reneged on promises to keep certain factories open after sealing the deal, the regulator wants to see companies held to promises made during the bid process.

Following a public consultation earlier this year, bidding companies will have to publicly disclose much more detail on what they plan to do with the target company’s assets and its employees, and failing to make good on promises within one year after the deal closes will be made harder.

The put-up or shut-up deadline will also be shortened to ensure buyers are required to table a formal bid within four weeks of showing an interest, or walk away from the deal.

The panel hopes that the proposed changes will tilt the balance of the rules in favour of target companies that want to resist an offer in the case of an early announcement. It also hopes they will prejudice agreed offers where a genuine leak occurs, and give greater transparency to shareholders about the costs associated with an offer.

A number of lawyers back the changes. Charles Bond, partner in the public markets team at law firm Cobbetts, says the proposed changes “are intended to relieve some of the burden of the offer process from a company that is ‘under siege’. Offeree companies will have more certainty about the timing of the bid process.”

Duncan Macintosh, partner with Capital Law, says proposals that require bidders to clarify their intentions within a shorter timeframe, and improve the ability of workers at the target firm to make their views known, “fit with the obligation to be careful, accurate and fair – and are therefore welcome and appropriate”.

Ian Brent, head of corporate at law firm Davies Arnold Cooper, welcomes the move to prohibit no-shop clauses that restrict targets from actively soliciting competing offers following an announcement.

“This change could make competing bids more common, which could be good news for shareholders of target companies if the result is increased bid premiums,” he says.

However, Iain Newman, partner and head of corporate at Nabarro, believes the changes could have an adverse effect on employees at target companies.

“Market practice will develop to allow the commercial objectives to be carried through in due course without being hamstrung by commitments about future intentions,” he says. “If anything, we are likely to see fewer specific statements on the lines of those made by Kraft and increasing non-committal statements about general intentions.”

Further consultation will take place on specific proposed changes to the code before the final changes are published.