UK M&A watchdog to curb "virtual bids," break fees

By Quentin Webb

LONDON (BestGrowthStock) – Britain’s takeover watchdog has unveiled proposals to make hostile bids harder but stopped short of endorsing the most radical ideas floated following the controversial takeover of Cadbury by Kraft Foods (KFT.N: ).

The plans would ban “break fees,” which penalize the party that walks away from an agreed deal, and call for more detail on a bidder’s finances and the fees paid to advisers. They would also give so-called “virtual bidders” just four weeks to “put up or shut up” after being named as a potential bidder.

Britain has been one of the world’s most open regimes for takeovers and among the biggest venues for dealmaking outside the United States.

But the takeover of Cadbury sparked furor in some quarters, partly due to hedge funds’ role in ensuring the deal went through and after Kraft later reversed a promise to keep a plant open.

The controversy prompted business leaders and politicians to ask if Britain’s openness was harming long-term interests. The Takeover Panel launched the most far-reaching review of the regime in decades.

The panel’s proposals would require:

* “Virtual bidders” to “put up or shut up” in four weeks unless they are working toward a friendly deal with the target

* A near-ban on break fees, currently limited to 1 percent, except where a target company is auctioning itself

* Publication of the fees that bankers, lawyers, public relations advisers and others stand to gain if a deal succeeds

* Better disclosure on plans for the target company and its employees, and making it easier for employees to raise concerns

* Detailing a bidder’s finances, the financial strength of a combined group, and the debt behind an offer “It is clear that some rebalancing of the rules is needed to check the evolution of market practice, which has run in favor of the offeror,” said Lindsay Tomlinson of BlackRock Inc (BLK.N: ), chairman of the Takeover Panel’s code committee.

“We will propose proportionate measures to do this, which do not require changes to law or compromise shareholders’ rights.”


The two most radical ideas were to raise the threshold for a successful bid from 50 percent plus one vote and to disenfranchise hedge funds and others who buy stock during a bid battle.

But the panel said they were “almost unanimously rejected” in its consultation and were “impractical,” given current company law. That echoes a Reuters poll of senior City figures that found near-total opposition.

One senior lawyer said the proposals showed how Britain’s attitude to takeovers had changed.

“This is quite far-reaching,” said Steve Cooke, head of mergers and acquisitions (M&A) at law firm Slaughter and May. “Two or three years ago, you would never have believed the panel would have taken these measures, but there is a new environment post-Cadbury.”

“It will have a real effect on virtual bids, but the devil will be in the detail. How do you distinguish between a bidder who has genuinely suffered a leak, and one that has made an announcement to put pressure on the target?” Cooke said.

Cooke said banning break fees was also “quite radical” and could deter private equity firms in particular from bidding.

The panel has had to balance its fairly limited formal remit — to ensure shareholders are treated fairly during deals — with widespread calls to rethink Britain’s dealmaking framework.

Business Secretary Vince Cable said it had become “too easy for bidders to make hostile offers and to succeed even though there are questionable benefits,” and it was “pleasing” the panel would address this. But he also plans a wider review of corporate governance and short-termism in finance.

And the CBI, a lobby group representing the employers of one-third of British private workers, called for “a full debate” about the power of short-term investors during bid battles.

The panel, under new Director General Robert Gillespie, a veteran investment banker, will now start detailed consultation on the changes it proposed.

The full document is on the panel’s website:

(Editing by Douwe Miedema and Will Waterman)

UK M&A watchdog to curb "virtual bids," break fees