Shadow games 

John Turnbull, corporate partner at Bircham Dyson Bell, examines the impact that changes to the Takeover Code are having on M&A deals.

After much fanfare, the changes made to the Takeover Code came into effect in September this year, with the intention of shifting the balance of power in takeover situations away from the bidder and in favour of the target company.

Amendments were introduced following a lengthy consultation process in which the Takeover Panel sounded out opinion on its proposals, which were designed to address concerns raised following the Kraft takeover of Cadbury.


The fact that the British chocolate manufacturer had succumbed to what was initially an unwelcome bid from the US company heightened concerns which had been brewing for some time. The Takeover Code, it was argued, offered too much tactical advantage to the bidder, with target companies remaining ‘under siege’ from unwanted bidders for too long.

Under the old regulations, target companies had to make what was known as a possible offer announcement if there was speculation or rumour about a bid or an unexplained movement in the target company’s share price.

Such an announcement would confirm the fact that talks were taking place (or not) but did not require the bidder to be named.

‘The amendments were seen by many as likely to deter potential bidders’
It commenced an offer period in relation to the target company, which could be a lengthy spell in which the target was effectively ‘under siege’ before a bid was announced or the potential bidder withdrew.

The target company had the right to ask the Panel to issue a ‘put up or shut up’ notice requiring the bidder to make the bid or withdraw within a specified period, but target companies were often reluctant to take this step.

The changes to the Takeover Code have addressed this issue in two ways. First, they introduced a requirement that a possible offer announcement must name any potential bidder with whom the target company was holding discussions.

While potential bidders would not have welcomed this change, on its own it might not have been too controversial.

The point that gave rise to significant controversy was the second requirement for any potential buyer named in this way to announce a firm intention to bid for the target company within 28 days, or such later date as the Panel might agree, or otherwise withdraw.

Withdrawing means that the bidder cannot re-approach the target company for at least six months.

These amendments were seen by many as likely to deter potential bidders, lead to a reduction in the level of bid activity and, in particular, to make it impossible for bidders to meet the new requirements if they were looking to raise bank finance for their bids.

It is no surprise that the private equity industry was said to have fought hard, but unsuccessfully, against the introduction of these rule changes.

While the 28-day deadline might be extended by the Panel, there were concerns that it would listen mainly to the views of the target company board, giving them the ability to force bidders into a position where they would have to withdraw unless their approach was whole- heartedly welcomed.

There were also concerns that target boards might be tempted to leak information to the press and thereby trigger the naming of an unwelcome bidder at a time when it was unprepared to comply with the 28-day deadline.


A number of possible bid situations were in progress when the new rules came into effect and a number have occurred subsequently.

Two potential buyers withdrew without seeking an extension of the 28-day deadline. However it is unclear whether that was a consequence of the short deadline or for other reasons.

Nine of the transitional cases were granted extensions to the 28-day deadline ranging from a further 28 days down to a five-day extension, followed by an extra day during which the offer was announced.

The most interesting case is the possible bid by Chengdu Geeya Technology, a Chinese company, for Harvard International, a supplier of consumer electronic products and owner of the Goodmans brand.

The possible offer for Harvard was originally announced on 28 September 2011, and any formal offer was stated to be subject to shareholder approval on the bidder side. Obtaining certain regulatory approvals in China was expected to happen within four months.

After the new 28-day deadline came into play, this has now been extended twice by the Panel for an additional 28 days on each occasion. It looks as if another two or three similar extensions may be needed before the bidder is in a position to make the formal offer.

The Chinese company has certainly tried hard to make its bid attractive, offering a 100 per cent premium to the share price before the approach and placing in escrow a £500,000 break fee which will accrue to Harvard if an offer document is not posted to Harvard shareholders by the end of March 2012.

The board of Harvard will presumably be urging the Panel to agree the further extensions and the Chinese bidder is likely to have sought and been given informal assurances that those further extensions would be forthcoming, provided the regulatory and other conditions to the bid were being addressed in line with the indicated timetable.


The new requirement to name the potential bidder will typically be triggered by a leak, giving rise to press speculation or a movement in share price. If strict confidentiality is maintained, potential bidders and target boards can continue to discuss matters in private according to their own timetable, as has always been the case.

Preserving confidentiality is a requirement of the Code, so any deliberate leak of information by a target board (or a potential bidder) would be in breach of the Code.


The extensions granted by the Panel in the case of Harvard International show that it is possible to secure Panel agreement to a significantly longer bid timetable. Further cases will be needed to establish the situations in which significant extensions are likely to be available, but this one suggests that where the target board puts forward a compelling argument for significant extension the Panel is likely to agree.

Having said that, the Panel appears to be using its power to grant extensions in a manner designed to accelerate bid timetables as far as that is possible.

Overall, the changes appear to have achieved a shift of tactical advantage to the target company as intended, but the implications of the 28-day deadline do not appear to be as draconian as some feared.



Todd Cardy

Todd Cardy

Todd was Editor of between 2010 and 2011 as well as being responsible for publishing our digital and printed magazines focusing on private equity and venture capital. Connect with...

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