Takeover Panel sweetens code for targets after Cadbury lesson

Panel acts after public finds squirty cheese behemoth’s legacy hard to digest. By James Swift

In true British style, it took the takeover of a traditional chocolate maker – a company that could tug at the country’s collective nostalgic heartstrings – to push M&A reform to the top of the agenda.

But it was not just that one of the UK’s best-loved brands was being delivered into the hands of a ­company that sells cheese in a spraycan that made Kraft’s takeover of Cadbury so unpopular. Rather, what jarred was the sense of ­helplessness that Cadbury, advised by Slaughter and May, could not defend itself against the £11.5bn hostile bid from Kraft, advised by Clifford Chance, along with the US company’s broken promise to keep Cadbury’s Somerdale plant in Keynsham open.

It was on the back of this furore – and a more general concern that it was too easy for bidders to ­destabilise targets with vague offers – that the Takeover Panel published an initial consultation paper in mid-2010, with a longer-term view to revamping the Takeover Code. Now, after ­publishing its latest paper on 21 March, the panel is a step closer to introducing ­dramatic changes to its code.

The general feeling is that the proposals, as they stand, will go through unmolested. But would the new rules prevent another Kraft/Cadbury scenario and do they put too much power in the hands of targets?

When the Takeover Panel announced last year that it was going to review the M&A rules a lot of lawyers were concerned, ­fearing an overreaction in response to the public mood. At a time when ­corporate activity is still making a tentative recovery the last thing anyone wants is to put the brakes on deals. That said, it is clear that the present rules are unfair.

“Few systems in the world favour bidders as much as the UK’s”, says Allen & Overy corporate partner Richard Hough. “As soon as a ­bidder puts out an announcement, even a vague announcement, the target’s prevented from doing a number of things, such as ­significant M&A activity, because anti-frustration measures kick in, which can be pretty unfair.”

The most dramatic change under the new code is to the ’put up or shut up’ (Pusu) regime. Existing laws say a target must approach the panel to issue the suitor with a Pusu order, giving the bidder six to eight weeks to either make an offer or walk away.

Under the proposed revision, as soon as a bidder is named publicly the clock will start ticking and the bidder will have 28 days to make a firm offer. A target can ask the panel for an extension, but this request can only be granted towards the end of the 28-day deadline, and the panel has given itself the ability to refuse.

“Unsurprisingly, it’s the changes to the timetable that are going to grab most headlines,” says Norton Rose partner Paul Whitelock. “Certainly, as a bidder you’re going to need to be better prepared because you have to be certain that you can convert an interest into a firm offer within four weeks of it being announced.”

Another change being mooted is a ban on deal protection measures, which would mean an end to inducement fees, implementation agreements and other offer-related agreements.

An exception to this would be if a company was targeted by a ­hostile bidder, in which case the target would be allowed to offer a 1 per cent inducement fee to one white knight.

A further change would see ­bidders held to the promises they make about the future of merged companies (such as keeping ­factories open) for 12 months, under pain of disciplinary action.

The new rules promise to take a lot of work off the table for lawyers, although the new code is complex and the shorter timeframes mean experienced firms with large teams that can put deals together quickly will be at a premium. The bigger concern is that the new code will stifle the market as a whole.

“The impact of the code, on one level, will be that it will simplify things, since it removes implementation agreements and all that stuff,” says Clifford Chance partner Guy Norman, who advised Kraft on the Cadbury deal. “On the other hand, the rules are complex and prescriptive, so companies will need strong and up-to-speed advisers who can pick their way through the rulebook.

“But one question that still needs to be resolved is whether the elimination of inducement fees will deter the private equity community, because [the companies involved] rely on those fees to cover their costs.”

Wachtell Lipton Rosen & Katz corporate partner David Katz agrees.

“[Removing inducement fees] is going to hurt deal activity, ­especially for strategic bidders and ­others who might not want to do a transaction without the safety net of receiving compensation for a failed bid,” he says. “Inducement fees serve a useful purpose, but not if they’re so high that they stop other potential bidders from ­coming in. But they can certainly help when third parties come in that might add value to ­transactions for shareholders.”

And although the new rules verge on being paternalistic (ie ­targets no longer have to decide whether to name bidders, extend Pusu deadlines or think about inducement fees), tools to protect targets are still thin on the ground.

It is a position that contrasts starkly with that in the US. Last year Katz, along with fellow Wachtell takeover defence expert Daniel Neff, successfully defended Airgas from a hostile $5.9bn (£3.7bn) bid from industrial gas company Air Products using a so-called ’poison pill’ to force the bidder to negotiate with the Airgas board rather than the company’s shareholders.

“While shareholders are the ­ultimate owners of a corporation they’re not always in the best ­position to judge its value in a sales transaction. Often, the directors are better placed,” Katz stresses. “But with the UK system there’s little in the way of tools the board of a company can use – such as rights plans – to negotiate and get the price up.

“In the US a company’s much more likely to remain independent after a hostile bid than in the UK. The proposed revisions to the code would deter some hostile bids, but once bids are launched it probably will not result in more companies remaining independent.”

Hostile international bids such as Kraft’s are likely to be much more difficult under the new rules, but in reality, once the barbarians are at the gate, there is little that can be done to stop them ­breaching it.