Paul Hackett/Bloomberg NewsThe London Stock Exchange building.
Britain’s new takeover rules take effect on Monday.
Many lawyers and investment bankers believe that the new rules will speed up the pace of British takeovers and produce more competing bids for companies. These same lawyers and bankers, however, argue that the new rules may also lead to fewer takeovers being made.
While the consequences of these new rules can be debated, there is little doubt that the British takeover rules stand in stark contrast to the takeover regime in the United States, which is much more protective of targets from hostile and competing bids.
The Takeover Panel of Britain acted as a result of Kraft Foods’ successful bid for Cadbury. Amid the public outcry in Britain against this deal, the panel began review of the takeover code. The panel wanted to conduct a general review but also examine claims in light of the Kraft bid that bidders could manipulate the takeover process to acquire control of British companies unfairly.
At the start of its review, the Takeover Panel asked for comment on a wide array of rules, including one that would have required a takeover to be approved by a two-thirds vote of a company’s shareholders instead of a majority.
The panel also considered rules that would have required shareholders to disclose interests of 0.5 percent or more instead of the current threshold of 1 percent, and disenfranchised shareholders who acquired shares while an offer was pending. All of these requirements would limit the power of arbitragers to determine the outcome of a competing bid.
They were intended to meet complaints that the Cadbury takeover had been decided by arbitragers who did not care about Cadbury’s long-term prospects merely the short-term premium offered by Kraft.
The final rules avoided these controversial rule changes. Instead, the new rules largely focus on regulating how and when competing bids are made.
As an initial matter the new rules are intended to limit the period a target is subject to a competing bid and forestall undue rumors about a takeover. Companies that are subject to such a bid or rumors often experience instability that can harm the company or otherwise force it to accept a bid it otherwise would have preferred to reject.
Two new rules will force takeover bids to progress faster than previously. Targets will now be required to identify by name any acquirer it is in talks with or an approach has been received when the talks or approach are made public. There is also new “put up or shut up” rule. Once a bidder is so identified, it will have 28 days to make a bid. Otherwise the bidder will have to sit through a cooling off period of six months.
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Merger negotiations leaks are rampant in London. When discussions start between a target and bidder, one of the first to-do items is often to draft the “leak announcement” — the news release acknowledging that talks are taking place once a leak occurs. And the Takeover Panel is vigilant in forcing companies to acknowledge talks are occurring or an approach has been made once a leak occurs.
These rules will thus make bidders and targets try to keep a tighter control on leaks in order to negotiate for a longer period without identification. But if the old practices hold and leaks regularly occur, bidders will be forced to act quite quickly and bid in 28 days.
In Britain, a bidder using financing cannot make a bid unless the financing is agreed to and firmly committed. There is talk that these requirements could hamper private equity bidders who are unable to secure their financing in time. And other bidders may not be able to organize a bid in that time period. The result may mean that there are fewer bids, as bidders are deterred from bidding.
The rules also enhance the disclosure required for fees paid to advisers such as investment banks and also provide a platform for employees to express a view on any takeover.
The second significant new rule limits termination fees and other deal protection devices. Under the old rules, targets were restricted in the amount they could agree to pay to a bidder to compensate an initial bidder if a third party subsequently agreed to acquire the company. The limit was 1 percent of the value of the transaction.
The new rules forbid termination fees. They also go a step further. In the United States, in addition to termination fees targets typically agree to provide bidders a whole array of other deal protection rights, including information rights that provide an initial bidder the right to information about the terms of a competing bid and matching rights which allow an initial bidder to match any subsequent bid. Targets also agree to not solicit other bidders and to not talk to other bidders unless certain conditions are met.
The new British rules ban all these other types of arrangements. The Takeover Panel has stated that these types of protections may “deter competing offerors from making an offer, thereby denying offeree company shareholders the possibility of deciding on the merits of a competing offer.”
The new rules thus set up a nice dichotomy with the American takeover scheme. In the United States, targets can agree to large termination fees and provide extensive deal protections to an initial bid. Targets can also adopt a shareholder rights plan, or poison pill, which can prevent a company from acquiring the target.
But in Britain none of these devices are allowed. There is a level playing field. Bidders cannot gain any advantage over another bidder, and target directors cannot prevent shareholders from accepting a bid.
By providing such advantages, bidders are theoretically more eager to initially bid in the United States and will pay more for the privilege. The reason is that these initial bidders have a more certain deal and thus are more willing to incur the costs associated with making an initial bid. However, because these protections allow targets to steer deals to chosen bidders, there will be fewer hostile and competing bids.
In Britain, because bidders are not compensated for making the first bid, they will be less incentivized to ever bid and will bid at a lower price in order to adjust for this lack of recompense. There will be more competing bids, however, because initial bidders cannot hinder them through termination fees and deal protections. There will also be more hostile bids because targets cannot as easily fend off such bids.
Professor John Coats has provided some evidence that this is all true, although no full-scale study of these issues or a comparison of the British and American takeover regimes has ever been conducted.
We now have a golden opportunity to study this comparison, though. We are about to get a real-time experiment as we see how the British system is affected by these new rules.
Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.
Article source: http://feeds.nytimes.com/click.phdo?i=0433098e3175c94aad76ddb56c49b5ed
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