The Takeover Panel flexes its muscles against on-off bids

Depending on who you speak to in the City, the Takeover Panel is either the UK’s perfect regulator or an antediluvian anachronism run by out-of-touch establishment figures.

Its fans say it never leaks – unlike, say, the European Commission – and is utterly impervious to gutter-dwelling hacks. They say it is honest, straightforward and representative of the old City at its best.

To those less well disposed, it is an arcane non-statutory body staffed by mothballed establishment figures whose displeasure can get you blackballed in the City, and against whose rulings it is virtually impossible to appeal because it has such wide discretionary powers.

Whichever side of the fence you sit on – and the overwhelming majority of lawyers would support the first opinion – there can be no doubt that the panel, led by Richard Murley, in its own conservative way, is flexing its muscles at the moment.

This is a two-pronged attack. As revealed in The Lawyer (23 February), the panel is looking at what sort of codicils companies should be able to put on the formal or preconditional bids they make under Rule 2.5 of the Takeover Code.

However, the panel also launched two consultation papers on the way bidders use informal, or so-called ‘virtual’, bids under Rule 2.4 of the code.

Theoretically, companies that can’t or won’t commit to a formal bid can use a ‘virtual bid’ or ‘bear hug’ to give them breathing space to find out a little more about the target or to get finance in place.
However, what happens in reality is that the target or bidder, particularly in a hostile takeover, will phone up a friendly journalist and leak the story. Consequently, the whole thing will be fought out in the press with the panel having very little control over it at all.

The consultation documents are not something even the most dedicated corporate lawyer would want to plough through on a Sunday afternoon. But the broader issue they address is important: how long should interested bidders be able to disrupt share value without committing to a bid or a price?

A spokesman for the Association of British Insurers (ABI), one of the UK’s major shareholder bodies, says: “The whole subject of on-off bids has created market uncertainty. That’s what we don’t like… the panel is right to think about these things.”

The spokesman said the ABI was preparing a response to the consultation paper, but had not yet studied the detail of the proposals. “What it comes down to is: when does the panel recognise a real bid is in the offing?,” he said.

The ABI has been influential in changing the Takeover Code in the past – for instance, it played a major role in persuading the panel to take action in the Royal Caribbean-P&O Princess-Carnival love triangle.

The proposed merger between Royal Caribbean and P&O was set to use a dual-listed company (DLC) structure. Because DLCs were not then subject to the Takeover Code, Royal Caribbean and P&O, with their lawyers Slaughter and May and Freshfields Bruckhaus Deringer, cleverly snuck in a much bigger break fee than usual and a joint venture, which was widely perceived as a poison pill. The ABI felt strongly and said loudly that this disadvantaged shareholders because it was an impediment to a rival bid from Carnival.

There is more of the tortoise than the hare about the panel.
Ordinarily it addresses such issues by drawing up a lengthy and complex consultation document as it has done on virtual bids.
However, after the furore on Carnival, the panel released a statement saying that it intended to bring DLCs within the code, and it fiddled about with the consultation paper afterwards.

The City of London Law Society and many individual City firms will be ploughing through the dense proposals as I write. At the moment, one suggestion that has drawn comment is that ‘put up and shut up’ orders, which are used to force bidders to show their hand, should be strengthened.

These orders are not enshrined in the code, but have in practice been used by the panel for some time – for instance, it slapped one on KKR in the Safeway bid and the private equity house dropped out of the bidding.

What the panel is now suggesting is that a bidder to whom a ‘put up or shut up’ order is given will not be able to talk about the target for six months. Another key issue is that if bidders specify a price in their virtual offer, they will, in most circumstances, have to stick to it once they move to a formal offer.

In reality, the upcoming consultation paper on pre-conditional bids will be more important than the discussion on virtual bids, because even with an amended Takeover Code the panel will probably find it hard to police virtual bids any better than it does now.

As a journalist, I can tell you definitively that companies involved in merger or a takeover scenario will talk to the press. And journalists will go to court to protect their sources, as they are doing over Interbrew. So the panel will have a fight on its hands to rein in bidders who use the press to test the waters, or as a tactical weapon to beat the target into submission. It will have a much easier job clamping down on the ever-growing list of preconditions bidders attach to their formal bids.

Perhaps one of the reasons the panel has not yet got around to releasing its proposals on preconditional bids is that it has trouble in its own backyard. The Department of Trade and Industry is deciding how to implement the Takeover Directive, which will almost certainly make the panel a statutory body.

Born in the ether of City traditions rather than set up by the Government, the panel has a much less civil service feel to it than the other regulators. “If they don’t get it right now, at the pre-implementation stage,” says one City lawyer, “there’s a real danger that it will get bureaucratised.” Yes Minister at the Takeover Panel – the thin end of the wedge, surely?