After taking longer than expected, in late March the Takeover Panel published draft proposals to implement the much-trailed amendments to the Takeover Code in response to the political outcry following Kraft’s acquisition of Cadbury.
The proposals reflect the prevailing political argument that companies need to be protected from aggressive and opportunistic takeovers by bidders whose sole interest is in turning a fast buck at the expense of UK plc and its employees. They also reflect the general attack on City advisers’ fees, particularly those of bankers, following the financial crisis.
The most talked-about changes are the moves to counter so-called virtual bids. These include early public naming of potential bidders, a fixed 28-day period for bidders to announce their fully financed bids and the outlawing of deal protection measures such as non-solicitation and break-fee agreements.
As a result of these changes it will be increasingly important to keep potential transactions confidential and avoid unnecessary or tactical price-negotiating delays. Neither bidders nor targets want to be linked to abandoned transactions, as bidders are seen as unable to commit to their deals while targets suffer the suspicion that bidders must have found something untoward to make them withdraw. However, in competitive situations we may see well-advanced bidders deciding to make the process public, forcing the identification of their rivals.
Although the panel has indicated that it will be receptive to joint requests from bidders and targets for extensions to the 28-day deadline, bidders will be nervous until it becomes more clear what the panel will and will not agree to and the extent of the public disclosure of the process (as well as market reaction to disclosures).
Shortened timeframes may also affect negotiating tactics as bidders weigh up the risks of losing time negotiating points against the benefits of completing as much of their work as possible before the process becomes public.
As these restrictions will not apply when a target conducts a formal sale process, we are likely to see bidders trying to persuade targets to adopt such processes. This should allow bidders more time to work in private on their bids while potentially helping to flush out competing bidders at an early stage.
Pressure for greater transparency is leading to increased disclosure of advisers’ fees on takeovers. Law firms and other advisers will as a result gain greater visibility on the pricing practices of their competitors. While the hoped-for outcome is to limit the use of success fees and increase price competition, there is a risk that it will have the opposite effect, with firms seeking to peg their rates to those of more expensive competitors so as not to be seen as selling cheaply.
Separately, advisers are likely to come under pressure to share fee risks on unsuccessful offers with clients as uncertainty increases with the loss of non-solicitation agreements and even the limited cost cover offered by break fees is withdrawn. While contingent fee arrangements are hardly new, law firms will need to look to the banking model of charging higher fees on successful deals to cover lost revenue on unsuccessful ones.
The proposed code changes are unlikely to result in any substantial changes to the way takeovers are conducted or the appetite of investors to pursue good business opportunities. Any changes are likely to be incidental and there will be new roles advising employees on the effect of offers, paid for by targets.
Overall, though, it is likely to be pretty much business as usual as the City again demonstrates its ability to adapt to change.