Shadow bids do not justify rewrite of UK Takeover Code

Who cares what shareholders think? The UK Takeover Panel doesn’t. Not according to Richard Buxton, head of strategy at Jupiter Asset Management, who wants better disclosure from the market regulator.

“I thought the Takeover Panel was insistent that bona fide approaches to companies from credible firms with access to resources were disclosed to the market,” Buxton told Sky News. “Recent examples would suggest this isn’t the case, with takeover approaches emerging in the media only after several such offers have been received.”

Part of the problem is that he’s wrong. The Panel has an assumed duty to keep companies honest but its operations manual, The Takeover Code, makes no such claim. Nevertheless, the remarks touch on a growing disquiet about the Panel’s light-touch approach, which some feel sidelines investors to favour the coterie of merger and acquisition advisers who play their overly mannered game by its rule book.

What helped foment opposition was a string of shadow bids for FTSE-listed companies. Equiniti, which provides of share registration services, was on the receiving end off several approaches from Siris Capital that became public only after the US private equity house turned hostile. GardaWorld of Canada took the same strategy with an offer for security contractor G4S last year after having had two offers privately rejected. Signature Aviation, the jet servicing group, reportedly received more than ten approaches from two rival bidders in the nine months before it revealed their offers last December.

At the heart of the issue is Rule Two of the Code, which defines the conditions around what needs to be said by whom. It assumes total secrecy unless and until the predator makes firm its intention to bid. Absent leaks and suspicious share prices moves, disclosure to the market becomes mandatory only after the “firm offer” qualification is met.

Contrary to popular belief, “firm” is not a synonym for “serious”. Directors are allowed to keep to keep fully-funded approaches from credible parties secret for as long as the firm commitment to bid is absent. That’s why, whenever outed by a leak or the expended patience of the predator, they will tend to justify previous silence by emphasising the uncertainties being taken into account.

For example, Equiniti stressed that its latest approach from Siris was a “highly conditional non-binding proposal” that was “subject to a number of preconditions including completion of detailed due diligence and arrangement of debt financing”. Siris disagreed, saying it was confident in putting together a formal offer by the end of a 28 day deadline that was triggered automatically by its breaking of cover.

Most offer talks never reach this pinch point. The vast majority exist in a purgatory state where any mis-step risks stalling the process. Advisors balance the inconvenience of triggering the deadline required by a public disclosure with the option to secretly pause talks, a trick provided for in the Code that they call going pens-down.

The incentive to keep shareholders in the dark is considerable. Pausing and staying silent about a leak sets a cooling-off period on any new bid at three months, whereas backing out in public bars the offerer for at least six months.

One of the first tasks for Ian Hart, the UBS banker who will be taking over as director-general of the Panel in July, will be to review these rules. There’s room for improvement, but recent events make an unconvincing case for a wholesale rewrite. Most of the failings that riled investors could have been fixed by more liberal use of the Panel’s existing powers to force a statement to stem rumour and speculation, or to prevent the creation of a false market. Taming false markets has become a priority, but The Panel doesn’t exist solely for the enrichment of shareholders. Its rules were drafted to minimise the disruption bids cause to a business, not to force transparency for transparency’s sake.

Shareholder groups will argue, claiming that they own the company, yet the legal rights afforded by equity give them no authority to define how an underlying business is run. When it comes to preliminary and putative takeover approaches, their right to know is no greater than that of any other stakeholder.

Who cares what shareholders think? The UK Takeover Panel doesn’t, at least not much, and long may it continue.

bryce.elder@ft.com