Takeover Code gives new rights to trustees


Introduction

Changes to the Takeover Code will shortly confer new rights for trustees of DB schemes whose sponsors are public companies1 subject to a takeover bid.

In this Alert:


Key points

  • The changes to the Code only apply to funded, DB occupational pension schemes.
  • Trustees will have the right to have their opinion on an offer made available to shareholders.
  • The new provisions apply to the target company’s DB scheme(s) on a group-wide basis, wherever located.

The Takeover Code (the Code)

The Code is designed to ensure that shareholders are treated fairly in a takeover. It provides an orderly framework within which takeovers can be achieved.

The Code comprises six general principles, which are essentially statements of standards of commercial behaviour, and a series of rules. Originally voluntary, the Code was placed on a statutory footing in 2006.


Background

In July 2012, the Code Committee (the “Committee”) of the Takeover Panel issued a consultation on changes to the Code. The proposed amendments were aimed at providing the trustees of the target company’s pension scheme(s) (the “Scheme”)2 and the parties to the offer with a framework for expressing and debating their views on the effect the offer would have on the Scheme. The Committee has now published the responses to the consultation and confirmed the changes which will be made.


Changes to the Code

The following changes to the Code will take effect on 20 May 2013.

Provision of information

To ensure trustees have sufficient information to express their opinion on the effects of the offer on the Scheme, the Code will require that they are provided with:

  • financial information on the bidder (also known as the “offeror”);
  • details of how the offer is being financed;
  • appropriate disclosures of the bidder’s intentions with regard to the Scheme; and
  • copies of certain of the documents relating to the offer, including:
  • the announcement commencing the offer period;
  • the announcement of a firm intention to make an offer; and
  • the offer document.

Statements – bidder

A bidder will be required to state its intentions with regard to:

  • employer contributions into the Scheme (including the current arrangements for the funding of any deficit);
  • the accrual of benefits for existing members of the Scheme; and
  • the admission of new members.

However, a bidder will not be required to make a statement on the target company’s future ability to meet its funding obligations to the Scheme (namely, a statement as to the impact on covenant). The Committee considered such a requirement would be disproportionate and might be likely to result in “disclosures which were not meaningful”.

Unless a longer period is specifically stated, a bidder will not generally be regarded as committed to a statement of intention with respect to the Scheme for a period of longer than 12 months (from the date the offer period ends).

Statements – target

The Committee canvassed opinion on whether the target’s board should be required to express its views on the effect of the offer on the Scheme. Based on the responses it received, the Committee has concluded that the Scheme’s trustees are “best placed to opine on the effects of the offer on the [Scheme]” and that imposing a requirement for the target’s board of directors to set out its views would “add little to the debate”. However, the Committee makes clear that there would be nothing to stop the target’s board from setting out its opinion and/or from stating whether it had sought the views of the Scheme’s trustees.

Opinion – trustees

After an offer document is issued, the board of directors of the target must issue a circular to their shareholders (and other specified persons) giving information on the offer and, in particular, their opinion of it.

Provided it is received in good time before the circular’s publication, the Scheme’s trustees will have the right to have their opinion on the effects of the offer on the Scheme appended to the circular. If the trustee’s opinion is not received in good time, the target company must publish the opinion on a website and announce that this has been done. The costs of the publication of any opinion will be borne by the target company.

The target company will be required to inform the Scheme’s trustees of their right to issue an opinion, (although the trustees are not obliged to do so).


Referral to TPR?

Prompted by consultation responses, the Committee looked at the possibility of imposing a requirement for the Takeover Panel to refer certain offers to TPR.3Having discussed this with TPR, the Committee concluded that this would be inappropriate as TPR already has a voluntary clearance process in place, and trustees and/or employers are therefore able to approach TPR on such issues at any time.


Will the changes improve trustees’ bargaining power?

As noted above, the amendments to the Code are intended to give trustees a voice and ensure that the effect of an offer on the Scheme can be discussed at an early stage in the process. But the ability of trustees to influence the outcome of a transaction will continue, to a large extent, to depend upon the specific powers they have in their pension scheme documentation.


1 In certain, limited, circumstances the Code applies to the takeover of a private company
2 The changes to the Code will also apply to schemes sponsored by the target’s subsidiary
3 For example, where in the opinion of the trustees the offer would be materially detrimental to the Scheme’s ability to meet its obligations and it had not been possible to agree appropriate mitigation by a specified date in the offer timetable