Will break fees become the norm?
26 July 1999
2 December 2013
4 November 2013
24 January 2014
28 October 2013
28 February 2014
Richard Godden, partner, Linklaters
Carol Shutkever, partner, Herbert Smith
Tim Emmerson, partner, Freshfields
The debate over the US practice of compensating companies which lose out on an acquisition to a counter-bidder is set to continue in the UK.
The compensation, commonly known as a "break fee", is a sum agreed between a bidding and target company to be paid to the acquisitor, at the shareholders' expense, if the purchase proposal fails.
But so far the City has opposed the infiltration of the US practice to the UK because shareholders from the target company are liable to pay the break fee.
In response, the City Takeover Panel has announced that it will cap break fees at 1 per cent to alleviate concern that shareholders are losing money.
But will this reassure lawyers that agreeing to pay a fee is not illegal under company law and does the debate threaten to prohibit progress between US-UK mergers?
Richard Godden, corporate partner at Linklaters, accepts that break feeshave become "almost the norm" because of US consolidation.
He says: "The US practice has been coming across the Atlantic and I suspect it will become more common.
"But he adds: "There is still some way to go to find an equilibrium. [The panel's decision] will ease the pressure for bigger fees, which can reach 5 to 7 per cent in the US.
"However, Godden says the unlawful financial assistance rules, laid out insection 151 of the Companies Act, prohibit break fees except in certain circumstances, which causes confusion in agreeing merger terms. "It's the bane of our lives," he says.
Godden also questions the timing of the panel's intervention, which coincides with the Department of Trade and Industry's (DTI) move to liberalise this area.
"It is paradoxical that the Takeover Panel has stepped in now the DTI is considering liberalisation," he says. "In some ways it muddies theposition. But as far as public takeovers in the UK are concerned, this issufficient to provide clarification that break fees are completely lawful."
However, Carol Shutkever, corporate finance partner at Herbert Smith, says the notice simply formalises the panel's policy.
"The panel has been trying to develop rules in line with current practice.This does not necessarily mean that rules have slackened, but that they aredoing it in response to market developments," she says.
"The panel has tried to steer a course between banning it completely and having a free-for-all."
She says the City is still getting used to the idea of break fees: "Before the beginning of the year, break fees were practically non-existent."
But Shutkever warns: "Financial assistance rules and those on directors' fiduciary duties apply irrespective of whether a deal falls under the UK takeover rules. Staying under the 1 per cent limit does not mean you are not in breach of fiduciary duties - but it helps."
In contrast, Tim Emmerson, corporate partner at Freshfields, plays down the panel's move.
"What the panel has done is in line with current practice. It won't make any difference."
But he concedes that the capping of fees means the target board and financial adviser must confirm that they believe a fee to be in the shareholders' best interests."It is difficult to see why substantial break fees are in the shareholders' interests in many cases," he says.
As to their commercial use, Emmerson says: "There is always a debate as to whether they are appropriate in the context of a given deal. This will invariably continue."
But he is sceptical of giving in to pressure from the US: "The DTI is not going to change the law just to accommodate overseas bidders' desires to negotiate break fees," he says.
"This isn't America," insists Emmerson. "It's a lot of nonsense. The panelhas been helpful and has produced a ruling which has made it easy to limit the fees in a way which supports existing practice."