Recent changes to the Takeover Code

United Kingdom
The Panel announced at the end of August amendments to the Takeover Code to bring dual listed company transactions within the Code and to clarify the rules governing inducement fees.

Dual Listed Company (DLC) Transactions

DLC transactions allow two companies to combine economically whilst retaining their separate corporate existences. There is no transfer or exchange of shares. Instead, contractual arrangements are entered into between the companies so that their shareholders are effectively in the same economic position as if they owned shares in a single company. DLCs can form a basis on which two companies (in different jurisdictions) are combined without certain political, commercial and tax difficulties that can arise when one company takes over another.

The Panel has extended the definition in the Code of "Offer" to include "dual holding company transactions". The Panel chose not to use the expression "dual listed company transactions" in order to ensure that the Code applies to transactions where only one of the companies is listed (although it is expected that DLC structures will normally involve both companies having and retaining listings).

The Panel had previously indicated that, although it expected to be consulted when a merger was to be effected using a DLC structure, the Code did not generally apply to DLC transactions, since they normally involve the dilution of voting rights rather than a change of control in Code terms. However, in the Panel's Response Statement 11, published at the conclusion of its consultation exercise on "Dual Listed Company Transactions and Frustrating Action", the Panel announced that, since DLCs are commonly used as a means of effecting a merger which would otherwise be structured as a Code offer, they should be brought within the Code.

The Response Statement noted that, as with schemes of arrangement under section 425 of the Companies Act 1985, certain Rules in the Code - such as those relating to timetable - will have to be applied flexibly by the Panel when dealing with a DLC transaction. For example, the Panel is likely to make dealings in both DLC companies subject to Rule 8 (which requires dealings in shares in the bidder and target during the offer period to be disclosed) and any subjective conditions to implementation of a DLC are likely to be subject to the same restrictions on subjective conditions as a Code offer (under Rule 13). However, Rule 10, which sets out the minimum acceptance condition for an offer, will not apply and implementation of a DLC transaction will instead depend on shareholder approval of the companies involved. Other Rules are likely to be interpreted by the Panel in a way that as nearly as possible puts a DLC transaction on the same footing as a Code offer.

In the consultation exercise the Panel had asked whether DLC transactions should only become subject to the Code once a competing offer was on the table. The responses were overwhelmingly in favour of making the Code apply to DLCs from the start, which avoids the problem of trying to apply the Code to the DLC transaction retrospectively.

Inducement fees

The Code was amended to clarify the types of "arrangements" to which Rule 21.2 (Inducement fees) applies. This Rule normally restricts to no more than 1 per cent of the value of the target (calculated by reference to the offer price) the amount which the target can agree to pay to the bidder if its bid fails. Often the fee is payable only if the board of the target recommends a competing offer.

In the Response Statement the Panel announced that the Rule would be clarified in order to catch other arrangements which have the same effect as inducement fees. Note 1 to Rule 21.2 was amended to make clear that the "arrangements" referred to in the Rule include "break fees, penalties, put or call options or other provisions having similar effects", whether or not in the ordinary course of business.

The Response Statement makes it clear that the Panel will look hard at all types of arrangements which have the effect of reimbursing a bidder for some or all of the costs it incurs in making a bid that fails, even if those arrangements are not characterised on their face as inducement fees, or are included in agreements entered into between the bidder and target for trading or other commercial purposes. For example, a joint venture agreement between A and B might give A the right to purchase B's stake in the joint venture company if B suffers a change of control. If A bids for B and they agree to vary the terms of the joint venture agreement to allow A to purchase B's stake at a discount if A's bid fails, and B is taken over by C, this should be treated as an arrangement caught by Rule 21.2. As a result, the amount of the discount would be limited by the Rule, and the other requirements of the Rule would have to be satisfied.

The The Panel's consultation paper (PCP11) and the Response Statement can be found on the Panel's website at
http://www.thetakeoverpanel.org.uk

For further information, please contact:

Gary Green (Corporate partner) at gary.green@cms-cmck.com or on on +44 (0)20 7367 2111

or

Peter Bateman at peter.bateman@cms-cmck.com or on +44 (0)20 7367 3145.