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On 19 September 2011, significant changes were made to the UK Takeover Regime and the Takeover Panel has issued a new Takeover Code. Broadly, the code applies to takovers of public companies in the UK/Channel Islands.

The changes provide increased protection for target companies against protracted and drawn-out virtual bids,strengthen the position of target companies, increase transparency and improve the quality of disclosure and provide greater recognition of the interests of the target company stakeholders. As a result, the UK may no longer be perceived to be a relatively buyer friendly environment for takovers of public companies.

A summary of the changes are as follows:

1. Identifying potential bidders

A target company that starts an offer period must confirm the identity of any potential bidder with which the target is in talks or from which it has received an approach (which has not been unequivocally rejected).

Where the offer period starts with an announcement by a potential bidder, the target company is not required to make an announcement identifying any other potential bidders with which it is in talks unless rumour and speculation specifically identifies a potential bidder that has not previously been identified.

2. Put up or shut up deadline

The “put up or shut up” regime has changed and a potential bidder is now required to clarify its position within a fixed period of 28 days following the date of the announcement in which it is first publicly named, unless an extension of that period is obtained from the Takeover Panel at the request of the target company. This deadline will fall away if any bidder subsequently announces a firm intention to make an offer.

3. Deal protection prohibition

The new Code prohibits a target company from entering into any “offer-related arrangement” (that is, any agreement,arrangement or commitment in connection with an offer) with a bidder which is outside the ordinary course of business. The prohibition covers inducement and break fee and also prevents exclusivity arrangements and implementation agreements from being implemented. This is a significant change as such arrangements were previously a common feature of public company takeovers.

4. Disclosure of advisers’ fees

Both the bidder and target company must disclose offer related fees and expenses, including the fees of financial advisers and lawyers, and for the bidder to disclose fees and expenses in relation to its bid financing arrangements. Any material changes to the publicly disclosed fee arrangements must be disclosed privately to the Panel who will determine whether further public disclosure might be required.

5. Disclosure of financial information and financing arrangements

Disclosure will be required in respect of financial information about a bidder, details of debt facilities (including interest rates, key covenants and security arrangements) and financing documentation will have to be put on display.

6. Statements about the target business

A number of changes have also been made to the Code which are aimed at improving the quality of disclosure about a bidder’s intentions for the target company and its employees following the bid, and improving the ability for employee representatives to give their views.

Contact: Russel Shear, Partner – Edwin Coe LLP
E: russel.shear@edwincoe.com

Shadow Directors – in the dark or a guiding light?

What do lenders, shareholders, managers and advisers all have in common? They may influence the direction of a company and assume a role as a shadow director. Owing to their financial and operational interests in a company, these stakeholders have an opportunity to instruct formally appointed directors with decisions in which they are accustomed to act.

A shadow director is to be assessed on their ‘real influence’ on a company and its board of directors. The decision of Ultraframe (UK) v Fielding and others held that the link between a boardroom decision and “a direction or instruction” from a stakeholder should be determined objectively. A stakeholder’s instruction to a director will not in itself create a shadow directorship. Suspicions may arise however if a majority of the board frequently make decisions in line with a stakeholder’s instructions. A company should be wary of empowering a stakeholder to negotiate (and sign off) on their behalf. It is also ill advised for a board to rely on a stakeholder’s judgment on important strategic and financial matters and to grant them the authority to veto the board’s decision.

There are exceptions to these rules however where a company engages a professional adviser. Under the Companies Act, lawyers, accountants and registered financial advisers will not generally be considered shadow directors. Yet professional advisers must not overstep their duties and exert a ‘dominant influence’. Professional advisers engaged in ‘turnaround’ are at particular risk where they negotiate and agree terms with the company’s creditors, financiers and HM Revenue and Customs.

Another exception applies under the Companies Act in relation to a body corporate. For example, a parent company will not be a shadow director if it merely sets out a group policy for its subsidiaries. However, were a director of the holding company to give instructions to a subsidiary, they may well be considered a shadow director and personally liable under the Companies Disqualifications of Directors Act 1986. (CDDA 1986).

If a shadow director is deemed to exist they will be subject to statutory duties as well as directors fiduciary duties. If members’ approval is sought, a shadow director is to be treated as a director of the company under the Companies Act. It is notable that a shadow director may be disqualified under CDDA 1986 and a liquidator may bring an action against him under the Insolvency Act 1986. Further provisions of the Insolvency Act 1986 apply in relation to shadow directors and should be considered in the event of an insolvent company.

In summary, stakeholders must temper their advice so as not to exert a ‘real influence’ upon directors while “professional advisers” should ensure their title holds true without dominating the decision making process. Shadow directors may often lurk in the dark but emerge as the guiding light to a company in need.

Contact: Russel Shear, Partner – Corporate & Commercial

Edwin Coe LLP

E: russel.shear@edwincoe.com