Ever-changing takeover regulation

Lately the UK’s government has proposed new measures to expand its interventionist role over transactions that raise national security concerns. How did the situation evolve and what does it mean?

Currently in the UK takeovers are regulated by the Companies Act 2006 as well as by the City Code on Takeover and Merg

ers. The Code regulates listed companies and was given statutory rights in 2006 as a part of UK’s compliance with the European Directive on Takeovers. Its main purpose is to ensure equal treatment of shareholders and it regulates which information in relation to the bid should be made public. Moreover, it sets minimum acceptance thresholds, consideration levels as well as regulates the length of some aspects of the bid. The regulatory body of the Panel on Takeovers and Mergers is responsible for the Code’s administration.

The latest update to the Code was introduced in September 2016 and related to the manner of communication and distribution of information. New amendments regulate the use of social media or webcasts, equality of information to shareholders and meetings with shareholders.

The Code was evolving along with politically contested transactions such as the GBP 11.9bn hostile acquisition of Cadbury by Kraft in 2010 or the failed Pfizer bid of GBP 70bn for AstraZenca in 2014. This time, these are concerns post the ARM acquisition by SoftBank as well as failed Kraft’s bid for Unilever this February. The falling value of the pound has made UK targets cheaper and thus sparked a new wave of discussion over national security as well as about an ease of foreign takeovers.

Firstly, after the failed bid for Unilever, its CEO, Paul Polman, raised some concerns over the lack of a level playing field for national champions. He suggested that the Takeover Code should take more of a Dutch approach and not only consider the interest of shareholders but also of stakeholders. Along with those voices and a more protectionist approach, the Conservative manifesto included points on the update of takeover rules. The propositions included giving a government an option to pause the bid to obtain greater scrutiny as well as requiring bidders to state their plan for post takeover developments. In September, following suggestions from the parliament, the Takeover Panel proposed the new requirements for the buyers to report back one year after the takeover on whether they stick to their promises for the target’s development plan. Moreover, the panel wants to add several disclosures concerning bidder’s plans for target’s R&D unit or headquarters to the already existing rules on reporting on staff, fixed assets, strategic development, and pension schemes. This comes directly as a response to the Kraft’s acquisition of Cadbury, where it promised to continue to use the UK factory, but soon after the bid was successful announced its closure. What is more, it would require delaying the publication of the hostile deal offer for two weeks from the announcement of bidder’s intentions in order to give more time for target to prepare its defence strategy. That point also touches on the concerns by the Unilever CEO over a lack of time for companies to defend themselves. Some examples of defence strategies against hostile takeovers can include Golden Parachute – large bonuses for management or establishing supermajority clause which requires usually more than 80% of shareholder acceptance threshold.

Furthermore, two weeks ago, the UK government has launched consultations into the new measures of merger scrutiny. The main aim of the upcoming changes to merger procedure is for government to gain power to intervene in small takeovers that raise national security concerns. So far, the government could intervene in military or technology transactions where the UK target had more than GBP 70m of turnover or share of UK supply increases to more than 25%. The proposal lowers the threshold to turnover above GBP 1m and scraps the share of supply requirement. As stated earlier, those changes are applicable especially to companies that “design or manufacture military and dual use products, and parts of the advanced technology sector” (gov.uk). Greg Clark, the business secretary, assures that Britain remained an advocate of free trade and those measures are to “close loopholes” in the merger procedures in the area of national security.

The laid out proposal could possibly impact the activity in middle market technology transactions as the review process could prolong and discourage foreign investors. Moreover, it will involve a lot more of legal work on the government side as the regulation will touch on a plethora of the UK’s businesses.

This is another example of the crucial role of the legislature in the M&A activity. Regulatory hurdles might be the most difficult to overcome for mega mergers and now could be an issue for even smaller transactions. In recent years we could observe regulatory hurdles on both sides of the Pacific, with China requiring foreign investments to meet state approval under the case of asset transfer out of the country. In the US, we could observe more protectionist rhetoric from President Trump of Chinese acquisitions in the US.

The consultations and comments on the proposals set out in September by the Takeover Panel should finish by the 31st of October 2017.