CHANGES TO the City Code on Takeovers and Mergers (the Code) – introduced by the Takeover Panel on 21 July – are going to put finance directors of plcs on a near permanent standby footing in case a suitor – wanted or unwanted – should suddenly materialise. The rule changes take effect on 19 September 2011, which does not leave much time to get their ducks in a row for FDs working at companies that are not already fully prepared.
There are three major rule changes and a number of smaller changes, but the one putting FDs under some time pressure is the 28-day so-called “put up or shut up” time frame. In the past, a target company could go to the Takeover Panel and ask it to make a “put up or shut up” ruling, which would usually put the bidder on a four-week schedule. The key point is that such a move would previously have been at the instigation of the target company, and the time frame gave that company considerable flexibility in deciding when it wanted to initiate that process.
The new rules remove that flexibility: the announcement that a named bidder has come forwards and the target company is now in play must be made the instant there is any sort of leak.
Of course, the 28-day rule applies equally to both parties but, as KPMG partner Maggie Brereton explains, the situation is not symmetrical. The bidder may well have known for months that it intends to make an offer for Bloggs & Co. This gives it plenty of time to do due diligence on the target company.
It might be objected that the books of the target company only open for the bidder once talks have formally begun, so bidder and target are on the same footing in that sense. As Brereton points out, however, this does not take into account that you can do a great deal of preparatory due diligence simply from a careful sifting of publicly available data. She and her colleagues regularly do substantial due diligence preparatory work on companies for clients well ahead of any bid offer.
With the guillotine of the 28-day rule in mind, the board of a potential bidder will now expect the FD to have a very good case ready, explaining what is good and what is not so good about the target, before the company will go anywhere near it.
Equally critical is the fact that the rules now require the bidder to disclose its funding documents from the moment the bid goes public. So the FD will have to ensure that all the negotiations with potential funders are completed well ahead of any possibility of a leak. Even press speculation about a potential takeover that could move the target’s share price would trigger the necessity for an announcement, and the FD will not want to get caught with the funding lines still snarled up on one technical issue or another.
If the onus is on FDs working at potential bidding companies to ensure that the research on targets is as complete as possible ahead of any “bear hug” (the process of initiating “friendly” talks with the target), the same is true – in reverse – of FDs working at potential target companies. All FDs of plcs will need to develop a 360-degree radar that seeks out potential bidders, Brereton says, and they will need to have their defence prepared well ahead of time. The prospect of having to cobble a defence together in 28 days is not going to be fun.
Along with the rule changes that force the name disclosure of any bidder, as well as the bidder’s funding arrangements (and fees), and that now set the 28-day clock running, the third major change is the prohibition on break fees. In the past, it was normal for the bidder to put pressure on the target to agree a break fee when two companies were in talks about a possible takeover. The break fee would reimburse a portion of the bidder’s costs if the target should break off talks because a different, preferred suitor has come along.
The Takeover Panel decided that break fees were not in the best interest of the target company’s shareholders and it has prohibited all such arrangements, explains Danielle Harris, a support lawyer with Maclay Murray & Spens. However, she adds that there is one exception to that prohibition. When the target is the object of an unwanted bid and manages to find itself a “white knight” to make a counteroffer, it may apply to the Panel for a waiver of the prohibition on break fees with respect to a break fee arrangement with the white knight. In this respect, FDs are also going to have to sharpen up their view to find out who their companies could regard as a potential white knight if a hostile bid should put them in play.
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The final rule change that will affect FDs working for potential bidders is the requirement to provide much more detail about a company’s intentions with respect to the target’s businesses. Following the example of Kraft’s “before-and-after” treatment of Cadbury’s factory (Kraft’s early statement that “Of course we won’t close it!” was replaced by a “Oh, you know what? I think we will.”), the Takeover Panel now wants much more clarity from bidders on matters such as factory closures or retentions. And bidders will have to know where they stand well ahead of time to comply with the 28-day rule. ?