Re Consultation Paper Issued By The Code Committee Of The Panel : Review Of Certain Aspects Of The Regulation Of Takeover Bids
26 July 2010
The Secretary to the Code CommitteeThe Takeover Panel
10 Paternoster Square
London
EC4M 7DY
July 26th 2010
Dear Sirs
Re Consultation Paper Issued By The Code Committee Of The Panel : Review Of Certain Aspects Of The Regulation Of Takeover Bids
Thank you for the opportunity to comment on the proposed changes to the Takeover Code (the Code).
The IR Society 's mission is to promote best practice in investor relations; to support the professional development of its members; to represent their views to regulatory bodies, the investment community and government; and to act as a forum for issuers and the investment community.
The IR Society represents members working for public companies and consultancies to assist them in the development of effective two way communication with the markets and to create a level playing field for all investors. It has nearly 600 members drawn both from the UK and overseas, including the majority of the FTSE 100 and much of the FTSE 250.
These members include many who have first-hand experience of navigating their companies through takeovers - on both sides of the fence. Our comments are drawn from their experiences. Specific answers to the Consultation questions can be found in the Appendix.
In section 1.6 of the Consultation the Panel states: "The rules of the Code are based upon six General Principles. These General Principles are the same as the general principles set out in Article 3 of the Directive. They are expressed in broad general terms and the Code does not define the precise extent of, or the limitations on, their application. They are applied in accordance with their spirit in order to achieve their underlying purpose."
Our view is that Code itself remains intrinsically strong but the implementation of the Code in practice no longer adequately reflects this principle. Our on-the-ground experience indicates that current interpretation is rather prescriptive - by the book. As set out in the detailed answers that follow, disclosure requirements and the strict implementation of the timetable impose limitations that would otherwise, in our view, be of benefit to offeree shareholders as a whole.
The IR Society strongly recommends that the Panel reflects on the impact of any restriction on several of the issues raised, especially (a) in the pricing of equities post a takeover announcement which could be adversely impacted by trading restrictions, thereby hindering a true valuation to be established; (b) the attractiveness of the UK market as a centre for international listings; and (c) the impact of restrictions during an extended takeover period on the register of the offeree and its relationship with shareholders.
In summary, our views are:
• We are in favour of maintaining the simple majority of acceptances, rather than raising the threshold.
• We are not in favour of restricting voting rights as we believe this will have a very uncertain impact on supply and demand for an offeree's shares post announcement and as a result market pricing of an offer will be impacted.
• To achieve share register transparency, and with a significant number of smaller hedge fund managers taking arbitrage positions, a lower threshold is appropriate during offer periods. We support the lowering of the threshold trigger to the proposed 0.5%.
• The existing regime is rigorous and effective in ensuring an offer is underpinned by long-term financing. More detailed disclosures by the Offeror are unlikely to influence investors in the longer term.
• Further independent advisers are superfluous, complicating the flow of information into the market, creating additional work, and adding additional fees for no material return to the investors.
• In respect of advisers fees and contractual terms, in our view, a better result would be achieved through a Panel review during a suitable early stage of the process to confirm they are in line with a general set of principles. A general range of fee expenses can be disclosed if required.
• Offeree shareholders should remain preeminent in the concerns of the Panel and as such we do not feel there should be strong protection of offeror shareholders. However, as a protection for offeree shareholders, we would encourage forcing offeror shareholders to vote on deals where the consideration is solely (or nearly entirely) in equity, reflecting the transfer of risk subsequently to offeree shareholders.
• The "put up or shut up" regime can best be improved by changing the timetable and disclosure requirements allowing much greater timetabling flexibility so that offerees can provide shareholders with the best information possible. For example, greater willingness to extending the 60 day timetable, for example by adjusting for holidays and valuable deadlines around period end reporting events.
As always, the IR Society will be happy to expand on its answers as required. Thank you again for the opportunity to comment.
Yours sincerely,
Richard Davies
Chairman
APPENDIX
Detailed responses to questions from the Consultation.
Section 2 : The suggestion that the "50% plus one" minimum acceptance condition threshold required to be achieved for an offer to succeed is set at too low a level and should be raised to, for example, 60% or two-thirds of the voting rights in the offeree company.
We are in favour of maintaining the simple majority of acceptances, rather than raising the threshold.
In our experience the market prices its initial reactions to offers well, allowing time for management to make its case and ensure stability in the share register through the process such that a sensible price can be determined. For example, in the case of Kraft Cadbury, a stable register, with only 25-30% of the register turning over during the process, ensured Kraft made an offer for the equities at a level that delivered a sensible valuation to the majority of holders. A company with a strong reputation, with good investor relations, will be given that opportunity.
We also consider that more restrictive or arduous takeover practices may limit the attractiveness of the UK market to new listings. The openness of the UK market is one of its key attractions, alongside scale, capital and expertise. The UK benefits significantly from the number of overseas listings, capital raisings, IPOs.
Changing thresholds without changing the underlying company law will also bring higher uncertainty and impact long-term the value of shares for smaller investors and other minority holders the Code should seek to protect.
Q1: What are your views on raising the minimum acceptance condition threshold for voluntary offers above the current level of "50% plus one" of the voting rights of the offeree company?
Q2: What are your views on raising the acceptance condition threshold for mandatory offers above the current level of "50% plus one" of the voting rights of the offeree company?
Answer: Not in favour, particularly reflecting mixed voting rights as set out in the Consultation and the potential impact on the long-term attractiveness of the UK as a capital market
Q3: If you believe that an increase in the acceptance condition thresholds for voluntary and/or mandatory offers would be desirable, at what level do you believe they should be set and why?
N/A
Q4: What are your views on the consequences of raising the acceptance condition thresholds?
Answer: As set out, our concerns reflect the impact on the long-term attractiveness of the UK as a financial centre and disconnects with the underlying company law that would undermine the effectiveness of any such change and create greater uncertainty for value for smaller and other minority shareholders.
Section 3 : The suggestion that voting rights should be withheld from shares in an offeree company acquired during the course of an offer period, such that those shares would be "disenfranchised" for the purposes of the takeover bid.
Overall, we would argue that a restriction of rights would create a highly uncertain impact on supply and demand for an offeree's shares post announcement; as a result market pricing of an offer would be impacted. Whilst top-slicing might be limited in the first instance, the tendency to run a long and low offer, as Kraft did for Cadbury, may result in a adverse outcome towards the end of the process, as a result of the artificially low market pricing of the offeree's shares.
Knowledgeable investors and analysts may be able to manage this (not necessarily well if experience is anything to go by) but the interpretations by the media and other commentators frequently misunderstand the markets behaviour, increasing the scope for an incorrect valuation and outcome.
Q5: What are your views on the suggestion that shares acquired during the course of an offer period should be "disenfranchised"?
Answer: The market pricing of an offer is likely to be affected, creating misinformation about true value and uncertainty for all concerned. Long-term investors may be discouraged from selling down or top-slicing their positions, which would in the early stages of a deal process be beneficial. However, current market pricing models would not work and determining appropriate responses would be significantly harder.
Q6: If you are in favour of "disenfranchisement", what are your views on how such a proposal should be implemented? In particular, what are your views on the various consequential issues identified in section 3 of the PCP?
Answer: Not in favour (see above).
Q7: What are your views on the suggestion that shares in a company should not qualify for voting rights until they have been held by a shareholder for a defined period of time and regardless of whether the company is in an offer period?
Answer: Strongly not in favour. In our view this would be highly prejudicial to shareholder value. Inevitably mixed voting rights create significant uncertainty with investors and in our view will also impact the long term attractiveness of the UK as a capital market for new entrants and existing companies looking for an open and straight-forward listing environment.
Section 4 : The suggestion that the 1% trigger threshold for the disclosure of dealings and positions in relevant securities under the disclosure regime in Rule 8 should be reduced to 0.5%. It also considers the suggestion that offeree company shareholders who accept an offer should be required to disclose that they have done so and raises the issue of the splitting up of dealing, voting and acceptance decisions and whether the Code's disclosure requirements should be amended to address this.
Register transparency, or the lack of, in the normal course of events is largely to the benefit of the offeree, affording them better knowledge, access and understanding of shareholders true interests. However, as seen in the Kraft Cadbury process, a significant number of positions were taken by hedge funds just underneath the disclosure threshold. This made it difficult to get true clarity of the state of the traded positions and the overall arbitrage interest in the deal. With a significant number of smaller hedge fund managers taking arbitrage positions, a lower threshold may be appropriate in these circumstances.
Consequently we support the introduction of 0.5% trigger threshold.
We would add one comment. The Consultation currently being undertaken by the European Commission on the effectiveness of the Transparency Directive proposes that the Directive becomes a maximum harmonisation regime, implying that both the existing and proposed trigger thresholds would have to be reviewed. The IR Society will be pressing in its response for an exception to be made for the disclosures during an Offer Period.
Q8: What are your views on the suggestion that the threshold trigger at which independent market participants become subject to the Code's disclosure regime, currently 1%, might be lowered to 0.5%?
Answer: We support this suggestion.
Q9: What are your views on the suggestion that there should be additional transparency in relation offer acceptance decisions and of voting decisions in relation to schemes of arrangement? If you are in favour of this suggestion, please explain your reasons and how you think such additional transparency should be achieved?
Answer: This is in practice very difficult to achieve and would benefit the offeror more than the offeree. If the issue of transparency of behaviour is important then institutional investors should be obliged to disclose and explain their voting record in the annual fund reports. We also note proposals from the European Commission on disclosure of voting records.
Q10: What are your views on the suggestion that the application of the Code's disclosure regime to situations where the rights attaching to shares have been "split up" might be clarified?
Answer: In our view, the impact on shareholder value is minimal. That said, the existing approach is more advantageous to offeree shareholders as they have a greater understanding and visibility of their register than the offeror and can therefore understand how voting rights may or may not be controlled.
Section 5 : The suggestion that offerors should be required to provide more information in relation to the financing of takeover bids and their implications and effects. It also considers the suggestion that the boards of offeree companies should be required to set out their views on an offeror's intentions for the offeree company in greater detail.
Internally the processes and controls through an offer process requiring the preparation of going concern statements is, in the experience of the IR Society members, rigorous and effective in ensuring an offer is underpinned by long-term financing. Disclosure of cost savings and additional details by an offeror company will help any introduction of a government led initiative to review an acquisition as to national interests etc. but is unlikely to influence investors. Indeed, greater pressure will be put on the offeree company to participate in discussions around synergies etc. to the detriment of a strong stand-alone strategy. In addition, statements by an offeree company as to the intentions of an offeror will do nothing but build barriers to engagement if required at later stages in the process and by their very nature would be speculative and possibly inflammatory.
As seen in Kraft Cadbury there is a need to maintain control over promises made by an offeror as an inducement to acceptance which are subsequently not honoured. Rules and penalties around such actions are now understood as a result of appropriate public actions being taken.
Q11: What are your views on the suggestion that the same requirements as to the disclosure of financial information on an offeror, the financing of the offer, and information on quantified effects statements should apply regardless of whether:
(a) the consideration being offered is cash or securities;
(b) the offer could result in minority shareholders remaining in the offeree company; or
(c) the offer is hostile or recommended, or whether a competitive situation has arisen?
Answer: No need to change the current requirements.
Q12: What are your views on:
(a) disclosures made by offerors of their intentions in relation to the offeree companies under Rule 24.1; and
(b) the views of the boards of offeree companies on offerors' intentions given under Rule 25.1?
If you consider that greater detail is required, how do you consider that this would be best achieved?
Answer: No change needed to current requirements
Q13: What are your views on the matters to which the board of the offeree company should have regard in deciding whether or not to recommend acceptance of an offer?
Answer: Directors' responsibilities as set out in recent Codes and the 2006 Companies Act indicate clearly that the fidicuary duty of the directors is first and foremost to shareholders, as noted in the PCP sections 5.16 and 5.17. To that extent a significant weight of argument is given to "the bird in hand" rather than a braver decision to push for a three to five year return based on a future valuation of the business etc. As a result, whether we like it or not, considerations such as best interests of employees, long-term ethical standards are often a secondary consideration. This could be redressed but only through changes to the Companies Act and its requirements on directors.
Section 6 : The suggestion that shareholders in an offeree company should be given independent advice on an offer, separate from that given to the offeree company's board of directors. It also considers the suggestions that "success fees" should be restricted and that details of the fees and payable to advisers, and costs generally, in relation to a takeover bid should be disclosed publicly.
Q14: What are your views on the suggestion that there should be a requirement for independent advice on an offer to be given to offeree company shareholders separately from the advice required to be given to the board of the offeree company?
Answer: Our view is that there should not be any further advice provided . There are already a raft of independent proxy firms, brokers and other commentators provide investment advice to small shareholders and others. The role of a further independent adviser would further complicate the flow of information into the market, mean additional work, and add additional fees and for no material return to the investors in question.
Q15: What are your views on the suggestion that the board of any offeree company should be restricted from entering into fee arrangements with advisers which are dependent on the successful completion of the offer?
Answer: Inherent in the value to be obtained from advisers is providing them with clear incentives to deliver services that result in the right outcome for all concerned. If the directors' responsibility is for shareholders, then they should clearly be using advisers to support the activities to the benefit of shareholders. If the structure of a contract or agreement runs contrary to that then clearly it is not right and should be prohibited.
With numerous outcomes possible in a well fought takeover battle involving one or more offerors and uncertain scenarios in respect of shareholder value creation, progress from a hostile offer to a recommended offer conducted by way of a scheme of arrangement (which is run by the offeree company) success fees based on a successful completion should be permitted.
We also consider that the contracts for services for all retained advisers including those involved in financial PR as well as banks, accountants, lawyers and solicitation agents, should be reviewed by the Panel during a suitable early stage of the process to confirm they are in line with a general set of principles. A general range of fee expenses can be disclosed if required.
Q16: What are your views on the suggestion that the fees incurred in relation to an offer should be required to be publicly disclosed?
Answer: We support the disclosure of a general range of fees at a suitable point in the takeover process, excluding details on structures and incentives as contrary to shareholders interests.
Q17: If you are in favour of the disclosure of fees, how do you think that any provision should operate? For example:
(a) to which fees (and other costs) should any provision apply and on what basis?
(b) at what point(s) of the transaction should any disclosure be made?
Answer: (a) all the fees including conditional elements, should be included based on a sensible estimate of time taken and complexity of work to be undertaken (some fees are based on hours worked etc.); (b) fees incurred to date and an estimate of full fees can be included in disclosures at different times in the process if required. In terms of timing, there should be a degree of certainty that material fees are going to be incurred before the first such disclosure is triggered.
Section 7 : The suggestion that some protections similar to those afforded by the Code to offeree company shareholders should be afforded to shareholders in an offeror company;
In general, as set out in the PCP, the Code and its rules are primarily to protect the interests of offeree shareholders, rather than the offerors. In this context, the interests of offeree shareholders may need protection against a misjudgement of the offeror's board if they are going to receive all the consideration in shares. As such, you can argue that for an all share consideration, where a transaction falls into a lower level of class test for the offeror, that there is a required shareholder vote as if the transaction was actually in a higher class test. Arguably, if this concern exists then offeree shareholders will recognise the reduced value of the consideration and price the offer accordingly, and therefore a higher price would and should be demanded.
In nearly all other cases, the interests of the offeree's shareholders are probably better reflected in a situation where the offeror cannot withdraw as a result of a failed shareholder vote. The arguments in 7.09 and 7.10 set out well the safeguards in general for the offerors shareholders.
Q18: What are your views on the suggestion that shareholders in offeror companies should be afforded similar protections to those afforded by the Code to offeree company shareholders?
Answer: As set out above.
Q19: If you consider that offeror company shareholders should be afforded protections:
(a) to which offeror companies should such protections apply and in what circumstances?
(b) what form should such protections take?
(c) by whom should such protections be afforded (for example, the Panel, the FSA, the Government or another regulatory body)?
Answer: As set out above
Section 8 : The suggestion that the Code's "put up or shut up" regime should be re-examined and whether "put up or shut up" deadlines should be standardised, applied automatically or shortened, and whether the board of an offeree company should be able to seek a "private" "put up or shut up" deadline. It also considers the regulation of possible offer announcements, "pre-conditional" offers, the possibility of reducing the 28 day period between the announcement of a firm intention to make an offer and the publication of the offer document, and whether the Panel should have the ability to shorten the offer timetables of second and subsequent competing offerors;
From our practical experience, we believe that some modest changes to the way the panel reviews the timetable and disclosure requirements will have a material impact on the process for offeree companies. For example, allowing much greater flexibility within the guidelines, or indeed their interpretation, for the offeree company to provide shareholders with the best possible information to make a judgement about value; providing greater timetable flexibility around the 60 days to extend for holidays, close periods, reporting events, counter-bidder activity etc.. We do not propose any material changes are made to the PUSU dates. A private PUSU regime is a good idea to limited disclosure restrictions in so far as possible.
Q20: What are your views on the suggested amendments to the "put up or shut up" regime? In particular:
(a) what are your views on the suggestions that "put up or shut up" deadlines might be standardised, applied automatically and/or shortened?
(b) what are your views on the suggestion that a "private" "put up or shut up" regime might be introduced?
Answer: (a). The PUSU rules as they stand are well implemented and flexible, although interpretation does favour the offeror in the first instance to ensure that if there is scope for a sensible offer to be made, it is done so for the interests of shareholders.
Answer: (b). A private PUSU regime would be a good idea to ensure that other restrictions under the Code can be lifted as quickly as possible. For example, if an offer process starts privately ahead of results, the level of disclosure around prospects and the companies ability to comment on market forecasts could be materially impacted and different from expected practice without shareholders and analysts being able to understand why. Deadlines for a private regime should consider these issues in determining what would be in the best interests of the shareholders of the offeree.
Q21: What are your views on possible offer announcements that include the possible terms on which an offer might be made and/or that include pre-conditions to the making of an offer?
Answer: No strong opinions on this issue.
Q22: What are your views on the deadline for the publication of the offer document and the suggestion that the current 28 day period between the announcement of a firm intention to make an offer and the publication of the offer document might be reduced?
Answer: Practice suggests that the 28 day period is too long and restricts the offerees ability to engage with shareholders during that period to explain their arguments. This is particularly sensitive in a process, as with Kraft Cadbury, where the 60 day timetable, rigorously enforced by the Panel, contained extensive market shut downs for Christmas and the New Year. In general, as part of the role of the Panel to interpret the principles of the Code, it should provide more flexibility in the way in which it considers the implementation of deadlines, and consider the needs of the offeree company. A shorter offer document timetable of say 21 days should allow for all reasonable arrangements for the offer to be made in this day and age of email, computing and 24/7 support activities.
Long periods for shareholder Consultation, post the publication of a final offer (d42), and more time for the introduction of new offerors (d50) would be greatly beneficial to ensuring an open process to the benefit of shareholders. In many ways, the 8 days should be sufficient but as in the case of Kraft Cadbury, this was reduced to only 3 working days as a result of the compression of the 60 day timetable due to other reporting considerations. This lack of flexibility could potentially be highly destructive to shareholder value for offeree shareholders.
Q23: What are your views on the suggestion that the Panel should have the ability unilaterally to foreshorten the timetable for subsequent competing offers?
Answer: there is no reason why competing offer timetables cannot be materially shortened to 45 or 50 days as set out in 8.29. To make a competing offer within the 60 day timetable, the new offeror has to have already done significant financing work and be prepared for detailed disclosures (which is why they need more time between d42 and d50). Converting these into a full offer should subsequently be a swift process. To the point raised in Q22 though, a longer period (48 or 72 hours more) for a competing offeror to emerge would arguably be helpful to shareholder value.
Section 9 : Consideration of concerns raised in relation to inducement fee arrangements and other deal protection measures which might give undue power to offerors to frustrate offers by potential competitors.
Q24: What are your views on the Panel's approach to inducement fees? In particular:
(a) do you consider that inducement fees should be prohibited?
Answer: No. Guidelines should enforce the views set out in section 9 that it is not required, and that an inducement fee or implementation agreement should only include a fee if it is the judgement of the Board of the offeree that it is clearly in the best interests of their shareholders.
(b) if you consider that inducement fees should continue to be permitted:
(i) do you regard the de minimis nature of inducement fees (and the Panel's approach to what is de minimis) as a sufficient safeguard?
Answer: Yes - 1% is de minimis enough but at the same time, permits a serious counter-offer to emerge if required, and would be sufficiently embarrassing to a Board should it have to be paid.
(ii) do you consider that any further restrictions should be imposed on inducement fees by the Panel (for example, in relation to the timing of payment or the triggers for payment)?
Answer: No
(iii) what are your views on the suggestion that the Panel should cease to require confirmations from the offeree company board and its financial adviser that they each believe the inducement fee to be in the best interests of shareholders?
Answer: All such agreements and fees should be justified. Shareholders need to understand why. If you take away justification, then you reduce the impact of clarity of guidance (see Q24 (a) above)
Q25: What approach should the Panel take to deal protection measures? In particular, do you consider that any specific deal protection measures should be either prohibited or otherwise restricted? Please explain the reasons for your views.
Answer: Leave them unchanged
Q26: What are your views on the suggestion that implementation agreements and other agreements containing deal protection measures should be required to be put on display earlier than at present?
Q27: What are your views on "fiduciary outs" in the context of inducement fee arrangements?
Q28: What are your views on the ability of deal protection measures to frustrate a possible competing offer and on whether linking deal protection measures to the payment of an inducement fee may cure any such potential frustration?
Answer: No material additional views on Q26, 27 and 28 other than those set out above
Section 10 : The suggestion that safeguards should be reintroduced by the Panel in relation to substantial acquisitions of shares.
Q29: What are your views on the suggestion that provisions similar to those previously set out in the Rules Governing Substantial Acquisitions of Shares should be re-introduced?
Answer: Following on from the answers to section 2 and 3 there could be an increase in the attractiveness of pre-emptive acquisitions of shares should it be a more attractive way in for an offeror. As a result, some consideration should be given to the issue. However, the IR Society does not have a technical view on the issue.
