For those taken aback by the behaviours seen in the Kraft takeover of Cadbury, the current draft of the amendments to the Takeover Code suggests that some of the lessons have been learned.
Clearly the introduction of these amendments won’t prevent takeovers – hostile or otherwise – and possible job losses in the acquired company, but it will certainly make it more difficult for acquiring companies to be ‘economical with the truth’ regarding their plans. In short acquirers will be obliged to say, up front, want they mean to do with the acquired company and, for a fixed time period, to abide by these commitments.
How are the proposed amendments – popularly know as the ‘Cadbury Law’ – going to affect takeovers? Once talks are underway, the bidder must be identified publicly, thus giving everyone a chance to research the bidder’s track record on employment issues.
The bidder will then have 28 days to confirm whether it will make an offer. If it decides to go ahead then, within the next 28 days, the bidder is required to publish the Offer document which has to include information for employees and their representatives about the bidder’s strategic plans and the likely impact on employment; e.g. closures, changes to terms and conditions, etc. If there is not going to be any reduction in job numbers, the bidder will now have to say so explicitly rather than simply remaining silent.
Importantly, the Panel has now clarified the Code to make it clear that, providing confidentiality is observed, the bidder is not precluded from giving information to employee representatives, or from holding discussions with them, before the publication of the Offer document. So there will be no more hiding behind “the Takeover rules won’t let me” excuse.
The position of employee representatives has been strengthened. Not only must they be given the employment information, but they will have access to expert advice – at the target company’s expense – in order to gain a thorough understanding as to what this all means for the acquired company’s employees.
Details of how the deal is to be financed, repayment terms, interest rates, etc. will also be in the Offer document. These will be scrutinised in conjunction with the strategic plan, and the hoped for “synergies”. This is going to make it much harder for bidders to mask plans for restructuring and divestments.
So the HRD can expect to be facing some very penetrating questions from the employee representatives as to how some of the cost savings and promised shareholder returns are going to be found.
As well as questions, employee representatives will have a list of undertakings they will want the bidder to enter into. In addition to seeking to minimise redundancies, there will be demands to maintain conditions of employment, such as pensions and other benefits; all of which may have long term effect on operating costs.
Following the trends in Europe, it is quite likely that we will see requests for statements of intent on employment that go well beyond the immediate period, with bidders being asked to enter into commitments for as much as three to five years. And whatever statements or commitments the bidder makes will be binding.
Whether made in the Offer document, or in meetings, the current proposal is that bidders will be held to any statements that they make for the period indicated or, if no timescale is given, for a minimum of 12 months. So there will be no more backtracking immediately the ink is dry as we saw in Kraft’s takeover of Cadbury. The margin for manoeuvre just got smaller.
Of course these demands for information and undertakings are nothing new. But up until now, bidders have largely ignored the employee representatives and ridden out bad publicity that has arisen from employee concerns or the bidder’s subsequent actions.
What is different under the proposed Code is that the opinion of the employee representatives on matters relating to employment has to be published as an addendum to the Board response that will go out within 14 days of the Offer being published. So we have now moved to employee representatives, backed up by experts, having the right to have their voices heard.
I expect the proposed amendments will sound very familiar to those HRDs who have been involved in takeovers in continental Europe. The proposals are clearly moving the UK more into line with the European style model of employee consultations although, as yet, there is no suggestion that UK regulators can block or seriously delay a potential deal, as is possible in some jurisdictions.
Some of the proposed changes are quite subtle and, of course, they may yet be watered down. But if they go ahead, the combination of the condensed timeframe (possibly as little as 10 weeks from start to finish), the requirement for earlier and wider disclosure of information, the binding nature of any statements, and the acknowledgement that employee representatives – backed by expert opinion – have a right to be heard, will put huge pressure on the HR function.
And the HRD? At exactly the same time as they are dealing with the onerous workload associated with due diligence, the HRD will have to ensure that the barrage of questions and demands from the employee representatives, backed up by experts, can be fielded. Commitments on the employment profile and associated costs will be binding for at least 12 months (if not longer), and this may have a material effect on the acquirer’s ability to deliver the benefits promised to shareholders in the timescale envisaged.
More than ever, the HRD will need to be integral to the acquisitions team and to be involved directly in the shaping of the offer and the negotiation of the deal.
