Powers of the panel

When UK regulator the Financial Services Authority (FSA) conducted an investigation into private equity towards the end of 2006, much of the press coverage focused on its claim that the collapse of a large private equity-backed company was “inevitable.” But, in fact, the two main concerns highlighted in the report related to conflicts of interest and market abuse, both of which were identified as “high risk” issues.
Furthermore, the FSA expressed particular concern over large public-to-private transactions. The organization’s wholesale business managing director Hector Sants recently raised concerns about the potential for market abuse arising from large private equity deals because of the sheer volume of people that can be involved in them and the greater likelihood, therefore, of leaks occurring.
The body which oversees M&A deals in the UK is the Takeover Panel, an independent organization established in 1968 to issue and administer the City Code on Takeovers and Mergers and to supervise and regulate takeovers to which the Code applies. Its main objective is to ensure fair treatment of all shareholders in takeover bids. In May 2006, the Code was adapted to incorporate a new EU Takeover Directive. There were few material changes to the Code as a result of the incorporation, but in some respects the powers of the Panel were increased.
For example, the Panel now has certain statutory powers to ensure that parties to a bid comply with its rulings, including new information gathering powers. If a party fails to comply, the Panel will be able to apply to court to enforce its request for information. It will also be able to make rulings restraining Code breaches or requiring parties to remedy breaches. Also, for certain Code rules the Panel will be able to order breaching parties to compensate affected shareholders. Again, it will be able to go to court to enforce compliance and compensation orders.
The net effect of this, say some observers, is that the Panel is now more powerful than it has ever been in its 39-year history. It is also busier than ever. In the 2006/07 fiscal year, the Panel presided over 143 bids: those are just the bids that made it as far as an official process.
In addition, there are countless rumors, sudden share price increases and media articles on bids that require the Panel’s attention.
Given the FSA report and countless other observations from interested parties, it would not be surprising to find private equity deals the subject of special attention from the Takeover Panel. However, Panel director general Mark Warham has been at pains to point out that the industry is not being singled out. In a recent interview with The Lawyer magazine, he said: “We’re there to protect participants in bids and we make sure that all bidders adhere to the Code. All bidders are subject to it, whether they be UK-based, foreign-based public companies or private equity houses. We don’t differentiate, providing they keep to the principles that the Panel oversees.”

Concern about leaks
Nonetheless, in the same interview, he went on to acknowledge the concern expressed in the FSA report regarding the potential for leaks when private equity deals feature a large number of participants.
He said: “Private equity deals tend to be leveraged and they tend to syndicate, all of which means there tends to be larger teams and longer timeframes with private equity deals. That of course means that leaks are possible, but we
deal with those consequences as and when they occur.”
One area where there has been pressure on the Takeover Panel to take action has been with respect to the socalled
“virtual” bid. This is where the intent of a predator circling a target company is clear, but no formal offer is forthcoming. This is a typical approach of private equity firms either reluctant to make hostile bids because of a lack of information, or forbidden to do so by their constitutions.
The problem with virtual bids is that the target company can be left in limbo for weeks or months, fighting a ‘phony war’ against the bidder whilst its management team tries to retain its focus on running the business. This is the reason why the Takeover Panel has in recent times stepped up its use of “put up or shut up” demands, designed to force the bidder to either make a formal offer or walk away.
One recent deal which forced this issue out into the open was the ultimately failed bid by a consortium comprising CVC Capital Partners, The Blackstone Group, Kohlberg Kravis Roberts and TPG to acquire supermarket chain Sainsbury’s for around £10 billion ($19.3 billion; €14.7 billion). Having been requested to do so by Sainsbury’s, the Takeover Panel intervened in early March this year by issuing a “put up or shut up” demand which gave the consortium five weeks to make a formal offer. When the deadline was reached, CVC released a statement officially pulling out of the deal following reports that its consortium partners had already admitted defeat sometime sooner.
The approach for Sainsbury’s, and other high-profile listed British companies such as Alliance Boots and EMI, has helped to draw attention to the transparency or otherwise of such approaches and the point at which intentions should be made known. Such considerations are right at the heart of the Takeover Panel’s role.
Says Ian Hamilton, a corporate partner in the London office of law firm Weil Gotshal & Manges: “If you can keep the bid confidential then no announcement is required by the Takeover Panel or anyone else. But Rule 2.2 of the City Code says there are certain circumstances where you do need to make an announcement.”

Share movement
So what are these circumstances when an announcement has to be made? One. is when a formal offer is made to a target company’s board. But before that point, announcements may be required when there is rumor and speculation about a bid and grounds for believing that a bidder’s actions have led to that rumor and speculation; or where there is an “untoward share movement” – normally when there is a sudden increase in the share price of ten percent or more.
Another trigger for an announcement is when more than six organizations become involved in the bid. So a bidder could, for example, work alongside a couple of banks, a financial advisor, a legal advisor and a target company shareholder, and as soon as the number of organizations goes above this level, the Panel may require an announcement to be made.
In terms of which party is obliged to make any announcement – prior to an approach, it is the bidder; after an approach, it is the target.
In the latter case, bidders will usually hope they are not identified by name: rather that, in its statement, the target will simply say it has been approached by a third party. “Not many bidders like to be in the limelight before they are ready to announce a bid,” says Hamilton. After all, there are sound reasons why private equity bidders will seek to do all they can to avoid showing their hands until the last possible moment. Not least, an official announcement will often send the target’s share price rocketing. However strong the insistence that any premium is relative to the share price before the approach became known, there is little doubt that the bid will be perceived as less attractive when this happens.
But while the existence of the Code rules means treading carefully is imperative, there are few signs that private equity firms face significantly more problems than other types of bidder. Worth considering though is that the Takeover Panel is currently studying how it should be responding to schemes of arrangement, which are frequently used by private equity firms as a way of effecting a takeover.
The scheme of arrangement has become more popular in recent years in cases where the bidder has not been able, or there is uncertainty about its ability, to attain the 90 percent acceptance level required to squeeze out minority shareholders. The primary advantages of a scheme are: the bidder needs to receive only 75 percent of acceptance from each class of target shareholder for the scheme to be binding on all shareholders; the provision of financial assistance can be approved by court; and there is generally a stamp duty saving available.
As yet, there is no official stance from the Panel on schemes of arrangement, which are approved by the High Court and are not subject to normal City codes. However, the Panel is currently drawing up a consultation paper to as it seeks to clear up any ambiguities.
Private equity firms will no doubt be awaiting further developments with interest.