On 5 July 2012, the Takeover Panel launched three consultations on proposed changes to the Takeover Code. These relate to: the types of company subject to the Takeover Code; profit forecasts and estimates, quantified financial benefits statements and material changes in information; and pension scheme trustee issues. The key changes proposed are considered in further detail below. The consultation period closes on 28 September 2012.
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Companies subject to the Takeover Code
What is the Panel proposing to change?
Under the revised rules, all companies incorporated in the UK, the Channel Islands or the Isle of Man (the ‘Code Jurisdictions’) would be subject to the Takeover Code provided they were either (a) public companies or (b) private companies that, broadly speaking, had been publicly traded in some manner in the previous 10 years.1
How is this different from the current position?
Under the current rules, a company incorporated in a Code Jurisdiction will only be subject to the Takeover Code if it meets the test set out in the previous paragraph and it is either (a) admitted to trading on a regulated market in the UK (for example, the Main Market of the London Stock Exchange) or a stock exchange in the Channel Islands or Isle of Man or (b) centrally managed and controlled in a Code Jurisdiction (what is termed the ‘residency test’). The Panel determine whether the residency test has been met.1
This means, for example, that an AIM traded company incorporated in Jersey will only currently be subject to the Takeover Code if it is centrally managed and controlled in the UK, the Channel Islands or the Isle of Man. Under the proposed new rules, on the other hand, such a company would be subject to the provisions of the Takeover Code automatically regardless of where it was centrally managed and controlled.
The Panel notes that it is aware of concerns that offers for certain other companies whose securities are admitted to trading in the UK will not be subject to the Takeover Code as a result of those companies having re-domiciled overseas (outside the Code Jurisdictions). It does not seek to address these concerns in the current consultation but notes that it intends to investigate whether it might be feasible and proportionate for some measure of Takeover Code protection to be extended to shareholders in such companies.
Why is the change being proposed?
The current position can be problematic in relation to companies that are incorporated in a Code Jurisdiction but are not admitted to trading on a regulated market in the UK and are therefore subject to the central management and control test. This can be a particular issue in relation to AIM traded companies, as AIM is not a regulated market for these purposes.
The main reason the current residency test may be considered unsatisfactory is that it can give rise to a lack of certainty as to whether the Takeover Code applies to such companies. This is primarily because the key factor the Panel will look at when determining the place of central management and control is the composition and residency of the company’s board. As a result, changes to board composition can alter the company’s Takeover Code status (in that it can, technically, slip in and out of being a Takeover Code company) and it can also be difficult for third parties, such as shareholders or potential bidders, to determine whether or not the Takeover Code applies. This can be an important issue if a bidder is considering an approach to a target or whether or not to acquire target shares ahead of such an approach as there would be important issues to consider were the Takeover Code to apply. Shareholders may also be unfamiliar with the way in which the rules work and may wrongly assume that they are protected by the Takeover Code simply because the company is incorporated in a Code Jurisdiction and is publicly traded in the UK.
What are the arguments against changing the current rules?
There may be some concern that it would be harder for the Panel to monitor the activities of companies where there is an insufficient nexus with the Code Jurisdictions (for example because all or a majority of the directors are resident overseas) and/or that the threat of sanctions from the Panel may not act as a sufficient deterrent to non-compliance with the Takeover Code in such circumstances. However, the Panel notes that since 2006 it has had the ability to use statutory powers to enforce its rulings (although it has not had to use these to date) and, historically, it has not encountered any significant problems enforcing the Takeover Code in relation to Main Market companies that are centrally managed and controlled overseas. On this basis, it does not believe that the risks identified should deter it from making the proposed changes.
1. Note that specific shared jurisdiction provisions apply under the Takeover Code where EEA incorporated companies are admitted to trading on a regulated market in the UK or UK incorporated companies are admitted to trading on regulated markets elsewhere in the EEA - these are not discussed in this briefing, as the Panel does not propose to amend these provisions.
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A number of changes are proposed in relation to Rule 28 of the Takeover Code, which deals with profit forecasts, including amendments intended to achieve greater consistency with other applicable rules and regulations. For example, new definitions of ‘profit forecast’ and ‘profit estimate’ are proposed which are more consistent with the equivalent definitions in the Listing Rules and the PD Regulation.2
In addition, a number of more substantive changes are proposed regarding the circumstances in which profit forecasts must be reported on by financial advisers and accountants. Under the current rules, any profit forecasts made by a target company or a bidder (other than a cash bidder) during the offer period must be reported on by its financial advisers and accountants. In addition, any such profit forecasts made before the offer period but which remain ‘live’ must be repeated in the offer document or response document and reported on in the same way.
What changes is the Panel proposing to make in relation to profit forecasts published before an offer period?
Under the proposed new rules, a forecast published before an approach was made would no longer need to be reported on, even if it were still ‘live’ (although the Panel could still require profit forecasts made by a bidder to be repeated and reported on if made prior to an approach but following the first active consideration of a possible offer). However, as such a forecast is likely to be a statement on which reliance will be placed in relation to the offer, the offer or response document (as the case may be) would still need to: (i) repeat the profit forecast (together with, amongst other things, confirmation from the directors that it remained valid and that the basis of accounting was consistent with the company’s accounting policies and an explanation of the assumptions on which it was based); (ii) include a statement explaining why it was no longer valid; or (iii) include a new profit forecast for the relevant period (which would be subject to the reporting requirements of revised Rule 28 in the same way as any other profit forecast published during the offer period).
These changes are intended to address a concern that, against a regulatory background of encouragement for greater transparency and forward looking statements by companies, the perceived difficulties of obtaining reports on pre-offer period profit forecasts may be deterring companies from giving forward looking guidance on expected profits, even where there is no reason to believe an offer is in contemplation. In this context, the Panel notes that such forward looking guidance may be useful to shareholders and other market participants and that it is commonly provided in various overseas jurisdictions. The Panel also notes that a profit forecast published before an approach is highly unlikely to have been influenced by the possibility of a future offer and therefore that the revised rules would represent a more proportionate approach as well as being more consistent with the requirements of the Listing Rules in relation to profit forecasts published prior to publication of a Class 1 circular.
What about profit forecasts published during an offer period?
Under the proposed new rules, the Panel would explicitly have the ability to grant a dispensation from the requirements of Rule 28 in relation to:
- A forecast published in the ordinary course of a company’s communications with its shareholders and in accordance with established practice. This change is intended to address concerns that the cost of obtaining reports on such statements could be disproportionate to the benefits of such reports to target shareholders (particularly in a recommended offer where there is no competing or hostile bidder). The relevant provisions make it clear that the Panel would only grant such a dispensation where each of the other parties consented.
- A forecast relating to a period ending more than 15 months from the date on which it was first published. This is intended to reflect the fact that the uncertainties of long-term forecasting mean it can be difficult to obtain reports on forecasts for financial periods extending beyond the short term. The Panel also notes that, even if such a forecast could be reported on, in many cases shareholders and other market participants would be likely to place considerably less reliance on it than on a forecast for the current financial year. There is also a risk that the difficulties of obtaining reports on long-term profit forecasts may prevent target boards involved in a hostile offer publishing forecasts for future financial periods as part of their defence strategy.
In both cases, details of the assumptions on which the forecast is based would still need to be included in the relevant document together with confirmation from the directors that the basis of accounting was consistent with the company’s accounting policies.
Are specific requirements proposed for profit forecasts relating to future financial years?
Yes. Where a profit forecast for a future financial year is published for the first time during an offer period (or where such a forecast has been published prior to the commencement of an offer period but following an approach with regard to a possible offer or is otherwise required to be repeated and confirmed in the offer or response document), a new provision is proposed requiring publication of corresponding profit forecasts for the current financial year and any intervening financial years. Such profit forecasts would need to be reported on unless they were made prior to an approach having been made with regard to a possible offer or the Panel was otherwise prepared to grant a dispensation on one of the bases referred to above or below.
The Panel believes that a profit forecast for a financial year beyond the current financial year will necessarily be based upon profit forecasts for the current and any intervening financial years, and that if such forecasts were not also required to be published this could result in companies taking advantage of the proposed relaxation referred to above for forecasts extending for more than 15 months and using forecasts for a future financial year to enable shareholders and market participants to interpolate a profit forecast for the current financial year.
Are there any other dispensations that may apply to the requirements of Rule 28 under the proposed new rules?
Yes. These relate to profit ceilings and to profit forecasts made by securities bidders where the number of shares to be issued is not material:
- A new Note to Rule 28 is proposed which would reflect the fact that the Panel may be prepared to dispense with the need to comply with Rule 28 in relation to profit ceilings (ie, forecasts stating a maximum figure for the likely level of profits for a particular period) in certain circumstances and outside of a management buy-out situation.
- The proposed changes include a specific discretion allowing the Panel to grant a dispensation from the requirements of Rule 28 if the offer could not result in the issue of securities representing 10 per cent or more of the enlarged equity share capital of the bidder and if the Panel considers that the application of Rule 28 would be disproportionate. Although a profit forecast of this nature is likely to be regarded as significant by target shareholders when deciding whether to accept the offer, the risk of a bidder overstating a profit forecast to make its shares seem more attractive is lower where the number of shares to be issued will only result in an immaterial increase in its issued share capital. The proposed change therefore addresses concerns that the costs of reporting on such a profit forecast could be disproportionate and may discourage bidders from making such forecasts at all.
Will different rules apply to profit forecasts in the context of management buy-outs?
Yes. Under the proposed new rules, profit forecasts made by the target company or the bidder in relation to management buy-outs or similar transactions, or where the offer is being made by the existing controller or controlling group, would not (except with the Panel’s consent) benefit from the proposed relaxations on profit forecast reporting requirements. In such circumstances, all profit forecasts made during the offer period (or prior to the offer period but which remain ‘live’) would still need to be reported on.
This is intended to address concerns that, in such situations, there is percieved to be a greater risk that the directors of the target company may seek to influence the outcome of the offer by the use of a profit forecast (including a profit ceiling). The Panel believes that if reports on profit forecasts of this nature were not required, shareholders would not be afforded sufficient protection.
Will the rules on profit forecasts apply to forecasts for part of a business?
Yes. It is proposed that the rules be amended so that Rule 28 would apply in these circumstances, although the Panel will have express ability to grant a derogation in appropriate circumstances (for example, where it does not consider the part of the business concerned to be material).
What about profit forecasts published by third parties?
This depends on whether the profit forecasts relate to the future profits of the party repeating or referring to them or to the future profits of another party to the offer:
- Where a party to the offer (other than a cash bidder) includes reference in a document or announcement to a third party forecast relating to its own future profits, the Panel’s current practice is to treat the relevant forecast as having been published by the party concerned and therefore subject to the requirements of Rule 28. This position would be codified under the proposed new rules. In addition, a new Note is intended to be introduced requiring parties to an offer (other than cash bidders) to remove any analysts’ profit forecasts with respect to their own profits from their websites upon commencement of the offer period.
- The Panel currently takes a different approach to repetition of third party profit forecasts relating to the future profits of another party to the offer, and does not typically treat these as subject to the requirements of Rule 28. This has given rise to concerns of an uneven playing field - for example, a hostile bidder could refer to a third party profit forecast in relation to the target company and the target board could be constrained in responding for fear of triggering a requirement for it to report on the relevant figures. As a result, the Panel proposes amending the rules to provide that, where third party profit forecasts relating to another party to the offer are referred to, these must take the form of ‘consensus’ forecasts. In addition, the party to which such profit forecasts relate should have a ‘right of reply’ without triggering the reporting requirements of Rule 28. Certain requirements would apply to the compilation of consensus forecasts for these purposes and disclosure requirements would include information on sources and bases of compilation. It should be noted that in a recommended offer, references to third party forecasts relating to the profits of another party to the offer will be treated as having been published by the party to whom such forecasts relate.
2. Commission Regulation EC 809/2004 implementing the Prospectus Directive
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What is the current position in relation to profit estimates?
Under the current rules, certain unaudited profit figures are not subject to the reporting requirements of Rule 28. Broadly speaking, the figures that fall within this exemption are:
- Unaudited statements of annual or interim results which have already been published.
- Unaudited statements of annual results which comply with the requirements for preliminary statements of annual results as set out in the UKLA Rules.3
- Unaudited statements of interim results which comply with the requirements for half-yearly reports as set out in the UKLA Rules where either the offer has been publicly recommended or, in relation to interim results of a hostile bidder, the offer could not result in the issue of securities representing 10 per cent or more of its enlarged voting share capital.
What changes are proposed?
Under the proposed new rules, an exemption will continue to apply in relation to preliminary statements of annual results which comply with the relevant provisions of the UKLA Rules.
The other exemptions will be widened to refer to half yearly financial reports which comply with the relevant requirements of the UKLA Rules, the AIM Rules for Companies or the PLUS Rules for Issuers and to interim financial information which has been published in accordance with a regulatory requirement and prepared in accordance with IAS 34. These exemptions will apply regardless of whether the offer is recommended or hostile.
These proposed changes will level the playing field for AIM and PLUS traded companies who cannot automatically take advantage of the current exemptions. It should be noted, however, that the exemption in relation to preliminary statements of annual results will only apply to AIM or PLUS traded companies where such statements would comply with the relevant requirements of the UKLA Rules. This is because of an absence of specific provisions in the AIM Rules for Companies and PLUS Rules for Issuers in relation to the contents of such statements.
3. Primarily the Listing Rules, the Disclosure and Transparency Rules and the Prospectus Rules
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Quantified financial benefits statements
What are quantified financial benefits statements?
The current Takeover Code refers to ‘merger benefits statements’ which are essentially quantified statements made by a party to the offer about the expected financial benefits of a proposed takeover or merger. The proposed changes would reclassify these as ‘quantified financial benefits statements’, with the new definition also extending to cover statements by a target company, as part of its defence strategy, quantifying any financial benefits expected to arise from cost saving measures (or an alternative transaction) that it would propose to implement if the offer is unsuccessful.
What requirements would apply in relation to reporting on such statements?
It is proposed that quantified benefits statements made during an offer period would need to be reported on in exactly the same manner as profit forecasts. This would involve a slight change to the current position (where merger benefit statements must be accompanied by reports from financial advisers and accountants confirming that they have been made with due care and consideration) to clarify that the accountants would be required to report on the compilation of the information on the basis stated and the financial advisers would be required to report on the quality of the process of preparation.
Additional, more detailed, requirements would also apply under the proposed new rules in relation to inclusion of supporting details and analysis.
Are there any circumstances where quantified financial benefits statements would not need to be reported on?
Yes. As is currently the case, reports would not be required in relation to quantified benefits statements made by a cash bidder. However the Panel intends to remove the current exemption in relation to statements made by paper bidders and target companies in the context of a recommended offer. The Panel notes that, where a target company has made a statement in relation to, for example, costs savings measures it intends to put in place in the future and that statement has been made with no knowledge that an offer might be imminent, the Panel would not normally require such a statement to be reported on. The proposed amendments make it clear, however, that the Panel should be consulted before any such statement is made following an approach having been received but before the offer period commences.
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Material changes to published information
What are the current requirements in relation to material changes?
Under Rule 27 of the Takeover Code, documents published subsequent to publication of an offer or response document must contain details of any material changes to information previously published by or on behalf of the relevant party during the offer period (or an appropriate negative statement) and must also update various disclosures made in the offer or response document including in relation to interests and dealings, material contracts, directors’ emoluments and no significant change.
What amendments are proposed?
The Panel’s view is that it is illogical only to require parties to the offer to disclose material changes where they publish a subsequent document but not otherwise. The proposed new rules would therefore require prompt disclosure of any material changes during the offer period to information previously published in connection with the offer. Any such disclosure would need to be made by way of an announcement, and the Panel would also have the ability to require a further document to be published.
The requirement to update certain disclosures where a subsequent document is published would continue to apply, but it is proposed this would be expanded to include additional areas such as the substance of the independent adviser’s advice (in the case of documents published by the target) and intentions regarding the future business of the target company and other matters referred to in Rule 24.2 (in the case of documents published by the bidder).
In addition, clarifications are proposed in relation to the updating requirements regarding profit forecasts, quantified financial benefits statements and asset valuations. Under the proposed new rules, subsequent documents would not only need to include confirmation that such statements remained valid but also confirmation by the accountants, financial advisers or independent valuers (as applicable) that any reports or opinions on such statements continued to apply.
The proposed new rules would also require announcements to be made when updated or new documents were put on display by a bidder or target - currently the requirement is only to include a statement to this effect on the relevant website.
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Pension scheme trustee issues
The new requirements proposed in relation to target pension schemes fall into five broad categories:
- New disclosure obligations for bidders in relation to their intentions with regard to the target’s pension scheme(s) and the likely repercussions of their strategic plans for the target company on such scheme (s). As with other statements of intention, bidders would be held to these for a period of 12 months from the end of the offer period unless there was a material change of circumstances.
- New disclosure obligations for target companies in relation to their views on the effects of the offer/the likely repercussions of the bidder’s strategic plans on the target’s pension scheme(s).
- New requirements obliging bidders and target companies to make the same documents available to the trustees of the target’s pension scheme(s) as they are currently obliged to make available to the target’s employee representatives. These would include, amongst other things, the announcement of a firm intention to make an offer and the offer and response documents.
- New rights for the trustees of the target’s pension scheme(s) to make their views on the effects of the offer on the scheme(s) known. Again, these would be broadly equivalent to the rights currently granted to employee representatives. Although the target company is obliged to pay for the costs reasonably incurred by the employee representatives in obtaining advice required for the verification of the information contained in their opinion on the effects of the offer on employment, it is not proposed that an equivalent requirement should apply in relation to costs incurred by the pension scheme trustees. This is on the basis that the costs of such analysis could be significant (for example, where actuarial or valuation analysis is required) and disputes could arise as to whether such costs had been incurred reasonably. The consultation paper notes that, in any event, the Panel understands that a sponsoring company will normally be responsible for paying the trustees’ reasonably incurred costs.
- New disclosure requirements in relation to any agreements entered into by the bidder with the trustee(s) of the target’s pension scheme(s) in relation to future funding arrangements for such schemes. Under the proposed new rules, agreements of this nature would need to be summarised in the offer document and put on display.
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In broad terms, the market is unlikely to find these proposed changes particularly surprising or find that they give rise to significant issues in the context of takeover bids.
The abolition of the residency test for AIM companies and extending the jurisdiction of the Takeover Code is likely to be welcomed. For some time, market participants have found the inability to identify whether a company is or is not subject to the Takeover Code unsatisfactory and the application of the residency test produces somewhat arbitrary results, particularly where companies in question have had little or no connection with the Code Jurisdictions.
The relaxation of the rules on profit forecasts have been a long time coming, with the delay in implementing the proposed amendments consulted on in 2010. The Panel’s proposed approach in relaxing the rules in connection with ordinary course forecasts seems proportionate. In addition, for overseas paper bidders who are more used to giving forward looking guidance in their home jurisdictions, having more flexibility in this respect will be helpful.
The changes relating to pensions were again anticipated, the Panel indicating at the time of the recent reforms in September 2011 that pensions issues would be on its agenda. The proposed measures seem sensible, although bidders might be concerned about the impact on the diligence exercise to be conducted to the extent they will now need to make statements in connection with pensions issues.
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