The Panel takes on Private Equity

The Takeovers Panel has responded to the current spate of private equity bids by issuing a draft guidance note and discussion paper.

The draft seeks to address a number of the concerns that have been raised about management involvement in private equity bids. Although the note is still in draft form, it indicates what the Panel is currently thinking and, in all likelihood, how it might approach an application for a declaration of unacceptable circumstances. However, as the Panel itself points out, the matters canvassed in the draft guidance note may also give rise to fiduciary duty issues and participants in buy-out transactions must separately ensure that they comply with those duties.

Overall, the draft does not contain any major surprises. Its comments on managing conflicts reflect what has become market practice and acknowledge that there is already a considerable body of law on the topic. (Indeed, it is debatable whether the Panel is the appropriate forum for some of these issues: in many cases, for example, a target board would already have put an appropriate framework in place before the matter even came before the Panel.)

On the contentious issue of equal access to information for rival bidders and shareholders, the draft shies away from a fixed position.

When to tell

A company's management, directors and advisers ("participating insiders") should tell the board:

• as soon as they've been approached to play a role in a bid; and
• before they start to make any plans for an MBO

The draft says that participating insiders should seek the board’s consent before they take any action, enter into any discussions or provide any information in relation to any possible bid. (If this is strictly complied with, it will make the initial evaluation of any opportunities difficult. It will also raise challenging issues for boards in terms of disclosure. By putting the board on notice of proposals before there is any real certainty around them, this policy could force the board into making premature disclosures to the market.)

For its part, the board should, as soon as it finds out about participating insiders' involvement in a potential bid and consents to the discussions taking place, set up an independent board committee and establish protocols for dealing with the matter. The Panel has suggested a number of appropriate protocols:

• requiring a representative of the target to be present at any meetings between the participating insiders and the bidder (this seems particularly impracticable);
• requiring participating insiders to stand aside or resign from their position as a condition of their being allowed to communicate with the bidder (this may not be appropriate in all circumstances);
• prohibiting participating insiders from providing any corporate information to the bidder without the approval of the independent board committee;
• prohibiting participating insiders from discussing the bid or competing bids with customers, suppliers or other employees without the approval of the independent board committee;
• requiring participating insiders to confirm that they haven't already disclosed non-public information to the potential bidder.

Equal access to information

Unlike the London Panel, the Takeovers Panel has never required target companies to give equal information access to rival bidders.

The draft guidance note doesn't change that overall position. However, where a bid is being made with insider involvement, the Panel would "scrutinise very closely" any refusal to give equal access to rival bidders (or potential rival bidders).

A related issue is whether target shareholders should be given the same information as a bidder who has insider assistance. There is a statutory requirement to give target shareholders adequate information to make an informed assessment of the bid. The draft appears to interpret that requirement as meaning that shareholders may need to be given equal access to forward-looking information provided to a bidder. However, the Panel has indicated that this issue is open to debate, because of the sensitivity of longer-range management forecasts.

We imagine that this will attract real resistance from corporates. Target boards are not going to want three-year forecast financials out in the market, because of the risk of ASIC intervention (based on Policy Statement 170) and the risk of a securities class action if the forecasts are not met. For their part, target shareholders may not derive any great benefit from this type of information - a fact which the Panel itself recognised in the Powertel 02 case in 2003:

"A bidder or target should only provide numerical forecasts if it has reasonable grounds for doing so. It will not always be reasonable for a company to publish forecasts it has prepared for internal use, even if it is prepared to base its own decisions on them and provide them to other industry participants."

Other issues

As well as the matters specifically dealt with above, the Panel has raised a number of related issues, which may not end up in the final version of the guidance note:

• attempts by bidders to "corner the market" for legal or financial advisers or debt providers in relation to target companies;
• collusion between bidders to reduce takeover competition for a particular target company (this picks up on Department of Justice inquiries in the USA);
• a target’s adviser favouring bidders who fund their bid with a debt financing facility offered in a sale process for the target company i.e. a "stapled debt package", where it is offered by the target adviser or its related entity;
• arrangements whereby participating insiders would be precluded from working for an alternative rival bidder, even where the rival bidder was successful in achieving control of the target company;
• whether there should be special requirements for an independent expert's report where insiders are involved in a bid (as is the case in the UK).

What happens now?

The draft guidance note is open for submissions until 6 April. There is no timetable for the issue of a final guidance note (if one is actually issued).

Even if a guidance note is eventually issued, it should be remembered that the Panel is not bound to follow its own guidance notes.

For further information please contact one of the team members listed below or any of our Private Equity or Corporate/M&A team partners.

Mark Paganin is a member of the Takeovers Panel.  He was not a sitting member on the Austral Coal matter