Panel consults on Takeover Code changes to provide certainty on treatment of offer period dividends

The Code Committee of the Takeover Panel (the Committee) has published Public Consultation Paper 2015/1 in relation to the treatment of dividends paid by an offeree company to its shareholders during an offer period. The proposed changes to the Takeover Code (Code) set out in the consultation paper are, in the Committee’s words “intended to clarify the existing provisions of the Code and to ensure greater alignment of the Code with the existing practice of the Panel Executive”.

Reserving the right to amend the offer price to reflect an extraction of value by way of dividend

The Committee is seeking to provide greater certainty as to when a revision to the offer price to reflect a pre-takeover dividend is permitted. Accordingly, the Committee is proposing to introduce three new notes to the Code to the effect that:

• an offeror may reserve the right to reduce the offer price by the amount of all or part of a dividend subsequently paid by the offeree;
• the offeror will not normally be permitted to make a reduction in this manner unless that right is reserved in each of:
  • any statement in relation to the terms of a possible offer (if made);
  • its announcement of a firm offer; and
  • the offer document itself; but that
• notwithstanding the above, an offeror may introduce an appropriate reservation at a later date but only when announcing an increased possible or firm offer, and provided that it does not reduce the offer below the value of the previous offer made without a similar reservation.

The draft practice statement set out in the consultation paper makes clear that, ordinarily, the inclusion of a condition to the offer that the offeree will not declare or pay any dividend prior to the offer becoming unconditional is not a qualifying reservation for these purposes. Similarly, it also makes clear that any arrangement between offeror and offeree with respect to the payment of dividends (for example, an undertaking by the offeree not to pay any dividend during the offer period) is a prohibited offer-related arrangement, and accordingly a reservation of the right to reduce the consideration is the appropriate protection mechanism for an offeror against leakage of value by way of dividend.

Mandatory reduction in the offer price to reflect a dividend payment where the offeror has made a “no increase” statement (absent a specific reservation)

The Committee is also proposing new notes to clarify that, where an offeror has made a “no increase” statement, the offeror must reduce the value of its offer by the amount of the dividend paid by the offeree unless a specific reservation of that right is made in the “no increase” statement. This reflects the existing practice of the Panel and seeks to ensure that the value of a bid which is the subject of a “no increase” statement is fixed, to enable the market to make their investment decision on the basis that such offer is final (and that no additional value is afforded to offeree shareholders by an intervening dividend payment).

Impact of dividends on a minimum offer price – clarificatory amendments

The consultation paper sets out some minor clarifications to the method of establishing the impact of dividends on the minimum offer price established by share purchases (broadly speaking, the Code establishes a minimum offer price by reference to the highest price paid by the offeror for target shares during the offer period, and certain specified preceding periods).

The consultation closes for comment on 12 June 2015.

Source: Public Consultation Paper PCP 2015/1 issued by the Code Committee of the Takeover Panel