Corporate lawyers have had their most frenetic 12 months in years and the acquisition frenzy is showing no signs of letting up.
It is in the calm corridors of the Takeover Panel that each deal is scrutinised, pondered and overseen. A frenzy it may be, but a free-for-all it most certainly is not.
The panel’s power has risen in direct proportion to the dynamism of the M&A market. It is more powerful now than it ever has been in its 39-year history.
Add to that the fact that schemes of arrangement, which are High Court-approved, are ever-more prominent (Iberdrola’s £11bn offer for Scottish Power and Japan Tobacco’s £7.5bn bid for Gallaher are just two examples) and the M&A landscape has become increasingly legalistic.
Be that as it may, lawyers are still held at arm’s length by the panel.
That was made abundantly clear during a separate matter in February – an embarrassing rebuke by the panel to investment bank NM Rothschild (see box). A senior source at the panel said: “One person must be primarily responsible for advising the client and that’s traditionally been the financial adviser. We’re happy to leave financial advisers as those with primary responsibility, and financial advisers fully understand that they bear that responsibility.”
While representative organisations such as the Confederation of British Industry (CBI) and the London Investment Banking Association (Liba) nominate members of the panel, the Law Society is nowhere to be seen on the panel’s list of nominating bodies. That is not about to change anytime soon, according to the panel’s director general Mark Warham.
“The nature of a self-regulating body is that it’s made up of its constituent members. In our case these are the most directly affected by the conduct of bids, and does not include the legal profession. Although I’d be the first to admit that lawyers contribute a lot; in the formal sense they contribute to consultation on various rules and we talk to them daily as advisers on deals,” he says.
The Rothschild debacle was a good example of the power of the panel and its every utterance.
Blackballing a renegade adviser or company for flouting the Takeover Code was the pinnacle of the panel’s powers since its founding in 1968. And it worked well until May 2006.
The Department of Trade and Industry (DTI), under an EU directive on takeover bids, then designated it a supervisory authority, with some of the panel’s regulatory activities coming under a legal framework for the first time.
Warham says: “When I walked through the door, the implementation of the EU directive was just happening. We’ve still retained our ability to act flexibly and quickly.”
But with regulatory powers, has the panel become too legalistic and burdensome to deal with? “The message we sent out, or tried to, was that it was very much business as usual,” counters Warham. “We wanted to make sure that parties to bids don’t take recourse to the courts as a first option. The market wants quick answers, and keeping things out of court is paramount. We’re reasonably optimistic that’s been achieved.”
It has been a busy year for the panel. It has presided over 143 bids this fiscal year, as well as 147 in 2005-06. And these are just the bids that make it to the official stage. There are countless rumours, share price spikes and press articles on bids that must be checked out by the panel, and its secondees assist in the process. It is one way at least that law firms can be integral to the panel’s workings.
Panel secondments are becoming an increasingly popular route for associates to take, with many lawyers viewing it as a fast-track to partnership. Current secondees include Slaughter and May corporate finance partner David Watkins, Hammonds corporate associate Nick Ivey and Berwin Leighton Paisner senior associate Amerjit Kalirai.
Be they lawyers, investment bankers, insurers, managers, accountants or traders, there is no difference in what secondees are asked to do. They become the first port of call for any adviser or company that has a question about the Takeover Code.
As well as more junior lawyers who are secondees, Allen & Overy veteran corporate partner Alan Paul sits on the panel (as distinct from the panel executive, which Warham heads), while Peter Scott QC is its chairman, a position that is appointed by the governor of the Bank of England.
Warham himself is on secondment from Morgan Stanley, where he headed M&A in the UK before he began his two-year term as director general of the panel at the end of 2005.
“One of the reasons director generals are seconded rather than it being a permanent position, and a reason we have secondees at other levels, is that we’re practitioners from the front line,” says Warham. “You bring with you your experience of how the outside world works. That way we try to make sure that we’re up to date.”
One area where lawyers are scrutinising just how up to date the panel could be is schemes of arrangement. As first reported by The Lawyer (5 February), the panel is set to study schemes and will clarify its position later this year. One-third of takeovers now employ schemes as a tool, despite no official stance from the panel. Schemes are popular because they give the acquiror 100 per cent control of a company or nothing at all and they save stamp duty – on mega-deals that tax can run up into many millions of pounds.
The panel is planning to send out a consultation paper to help clear up ambiguity. Schemes of arrangement are not subject to normal City codes, but are approved by the High Court.
Headline deals, such as the rival bids for Anglo-Dutch steelmaker and Slaughters client Corus by Brazil’s Companhia Sidérurgica Nacional and Indian group Tata, forced schemes back under the spotlight, particularly because they are not normally seen in competitive or hostile situations. It was the fact that the panel so far has no explicit stance on schemes that such legal engineering was possible, lawyers close to the Corus deal say.
Warham says: “What’s important is that people understand broadly how the panel deals with situations; what happens when there are two schemes, or a scheme and a preconditional scheme, as was the case with Corus. As the panel always does, if we’re in doubt we retreat to our first principles. There is always a balance between having explicit rules and retaining flexibility based on a set of principles.”
The panel has also been busy issuing ‘put up or shut up’ notices (see box). In the last fiscal year it issued 11 such notices compared with 10 in 2005-06. One reason for this is private equity’s ever-expanding role in general M&A.
Private equity houses typically cannot launch hostile offers and therefore are fans of the virtual bid, when intent is made clear but no formal approach is made. The panel will then step in to force the potential bidder to either make an offer or walk away for six months. The CVC Capital Partners-led consortium, advised by Clifford Chance, that made a failed bid for J Sainsbury in April was a case in point.
Unsurprisingly, the current furore played out in media headlines about the ‘asset-stripping’ ways of the private equity houses is yet to dent the calm of the panel’s offices.
“We’re there to protect participants in bids and we make sure that all bidders adhere to the code. All bidders are subject to it, whether they be UK-based, foreign-based, public companies or private equity houses. We don’t differentiate, providing they keep to the principles that the panel oversees,” says Warham.
But there are risks. “Private equity deals tend to be leveraged and they tend to syndicate, all of which means there tends to be larger teams and longer timeframes with private equity deals,” he says. “That of course means that leaks are possible, but we deal with those consequences as and when they occur.”
It might seem that nurturing the status quo is paramount to the panel, but Warham is not against progression per se. For the rest of his term his priorities are clear. “The name of the game is to make sure that we evolve and the code evolves as practice evolves,” he says.
With the M&A landscape being forever changed by private equity, and with schemes taking an ever-more prominent position, it might be that the panel will have to drastically refocus its lens.
•The smack of firm government: how the takeover panel keeps dealmakers in line
The auction for Corus: Tata v CSN The Takeover Panel put an end to a protracted skirmish for Anglo-Dutch steelmaker Corus by enforcing an auction in February, with Herbert Smith client Tata pitched against Brazilian mining company and Macfarlanes client Companhia Sidérurgica Nacional.
Indian conglomerate Tata finally emerged victorious in the eight-hour auction, with bidding continuing to the ninth and final round.
Tata tabled 608p per share in cash, making a £6.7bn takeover to forge the world’s fifth-largest steel producer.
Auctions are a highly unusual tool that the panel has used only twice – on the 2004 bid for Canary Wharf and in the 2005 fight for QXL Ricardo.
Put up or shut up
Deadlines issued by the panel to potential bidders, otherwise known as ‘put up or shut up’ notices, have become increasingly common. The clause requires potential bidders to either make a formal offer or walk away from the target for at least six months.
Analysts claim private equity’s increasing dominance of the M&A landscape has much to do with the increase in the notices because of their fondness for ‘virtual bids’. This is clearly a favoured tactic of private equity houses, which often cannot enter into hostile bids.
March saw the panel put out such an ultimatum on two notable occasions: it told the CVC Capital Partners-led consortium circling round Linklaters client J Sainsbury that it had to make an offer by 13 April (which it did, unsuccessfully) or walk away. The consortium was advised by Clifford Chance.
The panel also extended its ultimatum to DLA Piper client Castle Bidco by a day, seeing the vehicle eventually offer £715m for property developer Crest Nicholson, advised by Linklaters.
A slap on the wrist for Rothschild
Investment bank NM Rothschild invoked the wrath of the panel for flouting a basic tenet of the Takeover Code, which states that, once a bidder’s shareholding surpasses 30 per cent in a target, its offer must become mandatory.
In November 2006 Rothschild advised BT, whose legal adviser was Addleshaw Goddard, to buy shares totalling more than 32 per cent in Eversheds client and internet service provider PlusNet, which BT had previously offered to acquire for £66.7m.
The panel issued a rare public rebuke to Rothschild in February for the error, which also threw into relief the question of how much responsibility lawyers bear when advising clients on the code.
But the panel was clear that the buck stopped with Rothschild. It said in a statement: “Financial advisers to whom the code applies have a particular responsibility to comply with the code and to ensure, so far as they are reasonably able, that their client and its directors are aware of their responsibilities under the code and will comply with them.”