Takeover Code: September changes to profit forecasts and merger benefit statements regime

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1 September 2013 Takeover Code: September changes to profit forecasts and merger benefit statements regime On 30 September 2013 changes will be made to the Takeover Code s rules on profit forecasts and merger benefit statements. Background to the changes During the course of an offer, a target or securities offeror may wish to make a profit forecast, or may already have a profit forecast on the record, or may wish to make a statement on the expected financial benefits of the offer, which needs to be reported on by a party s reporting accountants and financial advisers in accordance with the Takeover Code. This is covered in Rule 28 of the Takeover Code. After a protracted consultation process, changes will be made to the Takeover Code on 30 September 2013 to: apply more proportionate reporting requirements to certain profit forecasts; provide a more logical framework for the regulation of profit forecasts and quantified financial benefits statements; and Contents Background to the changes... 1 Summary of changes... 1 Profit forecast reporting requirements... 2 Extending the scope of merger benefits statements... 8 So what is actually changing?... 8 Other changes updating material changes... 9 Next Steps... 9 Appendix improve coherence and consistency with other legislation and guidance. The changes do not significantly differ from the proposals of last year except that a target and a securities offeror will now be permitted to continue to publish analysts forecasts on their website provided certain requirements are met. Click here for our briefing on last year s proposals and here for the Takeover Panel s paper on those proposals. Click here for the Takeover Panel paper on the forthcoming changes. Summary of changes The changes to the existing rules include: a relaxation of the reporting requirements on profit forecasts: (i) published before any approach is made (i.e. a pre-approach forecast); 1

2 (ii) (iii) (iv) published in the ordinary course (i.e. where there is an established practice of a company doing so) following an approach; which relate to a period ending more than 15 months from the date on which they are first published (i.e. a long term profit forecast); and where the securities exchange offer consideration is immaterial relative to the offeror s enlarged share capital or to the value of the offer. regular reporting requirements: extending the exemptions for profit estimates to cover prelims that comply with the UKLA Rules and interims published under a regulatory requirement and in accordance with IAS 34; part of a business: extending the reporting requirements to profit forecasts made in respect of part of a business (with a recognition that a materiality threshold may be applied); MBOs/controlling shareholders: retaining the reporting requirements in the case of an MBO or an offer by a significant shareholder (i.e. the ordinary course profit forecast and profit ceiling exemptions not being available in such transactions); analyst forecasts: codifying restrictions on the circulation of third party profit forecasts in hostile offers to consensus profit forecasts and introducing certain requirements if a securities offeror or target continues to publish analyst forecasts on its website during an offer period; and merger benefit statements: expanding the scope of the regime on merger benefit statements (to be renamed quantified financial benefits statements ) to also apply to recommended securities offers and any quantified statement made by a target in an offer period as to cost savings or other financial benefits if the offer is unsuccessful. Amendments will also be made to Rule 27 to require that material changes to previously published information be announced by the relevant party promptly, regardless of whether or not a further document is published. Profit forecast reporting requirements (1) Which types of statements are caught? The following statements will be covered by the new rules: profit forecasts and estimates (as newly defined) for the whole or a material part of a business (the application of the rules to forecasts and estimates for part of a business is new see new Note 5 on Rule 28.1); 2

3 profit targets, budgets etc (excluding targets for employee incentive arrangements) - see new Note 1 on Rule 28.1; long-term profit forecasts (see below for relaxed reporting requirements) see new Rule 28.2; references to third party (e.g. analyst) profit forecasts and estimates by a party to an offer (which are treated as forecasts by such party to the offer this reflects the Takeover Panel s current practice) see new Note 6 on Rule 28.1; and profit estimates contained within required financial reporting announcements i.e. for periods that have ended (see below for relaxed reporting requirements) see new Rule However, a statement that puts a ceiling on the profits for a period is not considered to be a profit forecast or estimate and the rules will not apply to such statements save in the case of a management buy-out or an offer by a significant shareholder who might benefit from the announcement of a profit ceiling. The reporting requirements for statements covered by the rules will vary depending on when the statement is published, the type of statement and certain other factors, in each case, as further described below. (2) Timing of statements The new rule distinguishes two periods of time prior to the start of an offer period: (i) (ii) pre-approach: the period prior to an approach being made to a target (or, in some circumstances, the time before an offeror started to actively consider making an offer) i.e. before an offer was being discussed by the party concerned; and post-approach: the period after an approach has been made to a target (both before and after any announcement is made). One of the objectives of the new rules is to relax the reporting requirements in respect of statements made during period (i) above so that, before any offer is being discussed, listed companies feel that they are able to provide greater guidance to the market regarding profit forecasts without fear of subsequent Takeover Code complications if an offer situation unexpectedly materialises. The changes also seek to apply more proportionality to ordinary course profit forecasts made during the course of an offer (i.e. during period (ii) above). (i) Pre-approach The current rules require pre-existing profit forecasts to be reported on in most circumstances. The new rules provide that if a profit forecast is made prior to an approach (whether in the ordinary course or not) then it will no longer be necessary for 3

4 the relevant party s accountants and financial advisers to report on the forecast. Instead, the directors of the relevant party will need to: repeat the profit forecast and state that it continues to be valid and confirm that (i) the profit forecast has been properly complied on the basis of the assumptions stated; and (ii) the basis of accounting used is consistent with the company s accounting policies; or state that the forecast is no longer valid and include an explanation of why this is so; or update it by providing a new profit forecast for the relevant period (which would need to be reported on as a new forecast made post-approach see below). The Takeover Panel believes that these changes would make the Takeover Code consistent with the UKLA Rules relating to the publication of a profit forecast prior to publication of a Class 1 circular. This is a welcome relaxation from the Takeover Panel s current practice. See new Rule 28.1(c). This rule is subject to the restrictions listed below. (ii) Post-approach Following an approach, if a profit forecast is published it will normally need to include: the assumptions on which it is based; a report from reporting accountants as to the proper compilation of the forecast or statement and as to the basis of accounting used; and a report from financial advisers confirming that, in their opinion, the forecast or statement has been prepared with due care and consideration. This is consistent with the Takeover Panel s current approach. If the profit forecast is made before the start of an offer period, the relevant party will be required to repeat the profit forecast during the offer period and to include the assumptions and reports referred to above. See new Rule 28.1(b). Ordinary course profit forecasts However, if a company regularly publishes earnings guidance statements (or other statements including forward-looking information) as part of their normal shareholder communications (an ordinary course forecast ) and makes such a forecast after an approach is made, the new rules require that: if all parties agree (or the Takeover Panel considers reporting would be disproportionate), the profit forecast need not be reported on and only the directors confirmations set out above for pre-approach forecasts be required; and 4

5 if the parties (or Takeover Panel) do not agree to relax the reporting requirements, such forecasts be reported on by the relevant party s accountants and financial advisers in the same way as for ad hoc profit forecasts made post-approach. This compromise has been designed by the Takeover Panel in order to seek proportionality to the requirement (and cost) to produce reports in situations like recommended offers whilst maintaining a safeguard for other situations where the forecast may be challenged (e.g. in hostile or competitive situations). See new Note 2 on Rule These changes are separate from the ordinary course regulatory profit estimate reporting exemptions that already exist in Rule 28 see below for more detail. (3) Exceptions to the normal rules Long term profit forecasts The Takeover Panel has also tried to balance: the difficulties of providing reports from accountants and financial advisers on long term profit forecasts; the reduced level of reliance that shareholders and other market participants are likely to place on such forecasts; and the ability of targets to use long term forecasts or targets as part of a defence against a hostile offer. The new rules mean that no reports should be required for a profit forecast for any period ending more than 15 months from the date on which the profit forecast is first published. Instead, if a long term profit forecast is made following an approach (or repeated as a forecast already on the record), the directors of the relevant party will need to give a confirmation, where appropriate, that it is still valid, and that the basis of accounting used is consistent with the company s accounting policies and disclose the assumptions on which the profit forecast is based. In addition, if a party to an offer (excluding a cash offeror) publishes a profit forecast for a future financial period for the first time (or is required to repeat and confirm an outstanding profit forecast for a future financial period), that party will also be required to publish corresponding profit forecasts for the current financial period and for any intervening financial periods so that shareholders with a full sequence of projected profits. If the forecast for such intervening financial periods has not previously been reported on and doesn t fall within one of the available exemptions, such forecast will need to be reported on. See new Rule 28.2 and Note thereon. Management buy-outs and offers by significant shareholders Where the offer is a management buy-out or made by a significant shareholder, the Takeover Panel believes that there is a greater risk that the target directors may seek to influence the outcome of the offer by the use of a 5

6 profit forecast. Consequently, in such offers, any profit forecasts (other than long term forecasts) must be reported on regardless of whether they were published before or after an approach or whether or not they were in the ordinary course of shareholder communications. For the same reason, the normal exemption from reporting on statements including profit ceilings will not apply to management buy-out or similar transactions. See new Note 3 on Rule Small share exchange offers The Takeover Panel recognises that there may be cases where it is appropriate to grant an exemption from reporting requirements for a securities offeror if the securities being offered as consideration do not represent a material proportion of (i) an offeror s enlarged share capital or (ii) of the offer value. The principal basis for the change is that in such circumstances, the risk of an offeror over-stating forecast profits in order to make its shares more attractive to target shareholders is low. When considering whether to give a dispensation the Takeover Panel will take into account a number of factors including whether the deal is recommended; the purpose of the forecast and whether it is in the ordinary course; and the specificity of the forecast. See new Note 4(a)(ii) and (b) on Rule Profit estimates - exemptions in relation to regular reporting requirements Rule 28.6(c) currently contains exemptions for the publication of various unaudited profit figures in accordance with various regular reporting requirements (i.e. annual/preliminary or interim results) of companies that are bound by the UKLA Rules. In the new Rule 28.5, the exemption will be extended for certain interim management statements and to relevant statements made by companies listed on other exchanges. In summary, there will be an exemption for: a preliminary statement of annual results that complies with the relevant provisions of the UKLA Rules; a half-yearly financial report which complies with the relevant UKLAs, AIM or ISDX Growth Market rules; and interim financial information which has been published in accordance with a regulatory requirement and has been prepared in accordance with IAS 34. In addition, in appropriate circumstances, an exemption from reporting requirements should be available where a party to an offer which is not admitted to trading on a UK regulated market or on AIM or ISDX Growth Market includes a profit estimate in a preliminary statement of annual results, a half-yearly financial report or interim financial information published in 6

7 accordance with a regulatory requirement (normally within a framework equivalent to that in IAS 34). See new Rule Analyst profit forecasts Referring to third party forecasts The existing practice of treating a reference to a third party profit forecast (including average analyst forecasts) as being a forecast published by the relevant party (with consequent reporting requirements) will be codified. The sources and basis of any such average analyst forecasts must also be published. See new Note 6 on Rule Websites Consistent with this approach, at the start of an offer period, a target and a securities offeror will be permitted to continue to publish investment analysts forecasts on their websites during an offer period provided certain requirements are met. These requirements include stating the highest and lowest figures forecast by any investment analyst, updating the forecasts and including a prominent disclaimer that the investment analysts forecasts are not endorsed by the company. A target and a securities offeror cannot cherry pick which analyst forecasts it publishes on its website during an offer period; it can only exclude certain forecasts on the basis of them being too historic, made by an analyst in the same company group or, in exceptional circumstances, where they are wholly anomalous or prepared on a wholly different basis from that of other forecasts. If these requirements cannot be observed, the company will be required to remove from its website all such forecasts. See new Rule Hostile offers and defences consensus forecasts Parties to a hostile offer can continue to refer to third party profit forecasts relating to the other party but, in order to avoid selective use of such forecasts, must do so by only reference to a consensus forecast. A consensus forecast means a summary of analysts forecasts. An appropriate method of determining a consensus profit forecast would normally be to calculate the arithmetical mean of the independent published forecasts and the sources and basis of compilation will need to be disclosed. In order to enable a target to defend itself, where a consensus profit forecast is referred to by a hostile offeror, the target should have a right of reply, without triggering Rule 28 reporting requirements, provided the target does not endorse the consensus forecast. It should be noted that a consensus profit forecast can also only be used (without having to report on it) in the context of a hostile offer. 7

8 See new Rule Extending the scope of merger benefits statements Background to merger benefit statements under the Takeover Code A report is currently required from financial advisers and accountants if a party to an offer makes quantified statements about the expected financial benefits of a securities exchange offer which is or becomes hostile or competitive. This is currently covered in Note 9 on Rule 19.1 of the Takeover Code. Future changes Note 9 on Rule 19.1 will be incorporated within the new Rule 28 and: target statements: the merger benefit regime is being expanded to apply to any quantified statement of the expected financial benefits expected to arise in the context of an offer. This will now be called a quantified financial benefits statement and is newly defined. This means that it will also capture a quantified statement made by a target during an offer period (e.g. about a proposal that will only be relevant if the offer is unsuccessful). Costs savings measures published by a target prior to an offer period will not be subject to Rule 28, even if repeated during the offer period. However, if such costs savings measures are revised during an offer period, they will then be treated as a quantified financial benefits statement; recommended offers: reports will also be required in recommended share exchange offers; contents of report: the new rule includes detailed guidance on the basis of preparation of quantified financial benefits statements (which is consistent with the Takeover Panel s current practice); and target comments on hostile offeror synergies: a target cannot publish a synergies statement in relation to its own expectations as to the financial benefits of a proposed takeover (which is consistent with the Takeover Panel s current practice this is because a target will not be held to account for achieving such synergies). However, a target will normally be allowed to publish its own views on an offeror s quantified financial benefits statement. See new Rule 28.6 and the Notes thereon. So what is actually changing? The changes outlined above are a mixture of relaxations and extensions of the current rules and a codification of current Takeover Panel practice: Relaxations previously published forecasts; long term forecasts; 8

9 ordinary course forecasts in recommended transactions; profit estimates in annual/interim results for companies not on the Official List; Extensions profit forecasts of part of a business; application of merger benefit rules to statements by targets ( quantified financial benefits statements ); reporting requirements for merger benefit statements in recommended offers (i.e. now needed in hostile and recommended securities offers with merger benefit statements); requirements if publishing analyst forecasts on website in offer period; Codification of existing practice contents requirements for profit forecasts and quantified financial benefits statements; and references to analyst forecasts treated as forecasts of the relevant party. A summary table at the end of this guide illustrates the application of the principal provisions of the new Rule 28. Other changes updating material changes Rule 27 which deals with the update of any material changes in information is also being amended. The changes include: any material changes in information from an offer document/target circular must be published promptly by way of announcement, and not only when a subsequent document is published. expansion of the list of matters which must be updated in any documents published after the offer document/target circular to include matters such as an offeror s intentions towards the future business of the target, management incentivisation proposals, the target s opinion on the offer and the target financial adviser s advice. Next Steps The changes will take effect on 30 September This is the same date as the jurisdiction of the Takeover Code is being expanded; click here for a briefing on the Takeover Code jurisdiction changes. 9

10 Contacts For further information please contact: Nick Rumsby Partner (+44) Joanna Healey Senior Associate (+44) Author: Joanna Healey This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2013 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP together with a list of those non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ or on and such persons are either solicitors, registered foreign lawyers or European lawyers. Please refer to for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com. One Silk Street London EC2Y 8HQ Telephone (+44) Facsimile (+44) Linklaters.com 10 A /0.5/02 Sep 2013

11 Appendix Summary of the application of the principal provisions of the new Rule 28 NON ORDINARY COURSE PROFIT FORECAST ( PF ) FOR CURRENT YEAR 1 ORDINARY COURSE PF FOR CURRENT YEAR: OTHER PARTIES DO NOT CONSENT TO DISPENSATION ORDINARY COURSE PF FOR CURRENT YEAR: OTHER PARTIES CONSENT TO DISPENSATION PF FOR YEAR(S) ENDING MORE THAN 15 MONTHS FROM DATE PF FIRST PUBLISHED 2 PF first Directors confirmation Directors Directors published before approach (Rule 28.1(c)) confirmation (Rule 28.1(c)) confirmation (Rule 28.1(c)) PF first Reports Directors Directors published during offer period/after approach (Rule 28.1(a)/(b)) confirmation (Note 2 on Rule 28.1) confirmation (Rule 28.2) MBO or offer Reports Reports Directors made by a controller (whenever PF (Note 3 on Rule 28.1) (Note 3 on Rule 28.1) confirmation (Rule 28.2) first published) 1 2 Under new Rule 28.2, the Takeover Panel will normally consent to the disapplication of Rule 28.1(a) or (b) where a profit forecast relates to a period ending more than 15 months from the date when the profit forecast is, or was, first published. Under new Rule 28.2, if a target or securities offeror publishes a profit forecast for a future financial period for the first time during an offer period (or in an announcement which starts an offer period), or is required to repeat a previously published profit forecast for a future financial period in an offer document or target circular, it must also publish a corresponding profit forecast for the current financial period and for any intervening financial period(s). Such a profit forecast for the current financial period that has not previously been published will be required to be reported on, unless it is an ordinary course profit forecast and the other parties consent to a dispensation from the reporting requirements. 11