On 22 April 2013 the Takeover Panel (the Panel) announced changes to the City Code on Takeovers and Mergers (the City Code). The changes give a greater role to pension plan trustees in relation to takeover bids1.
The changes, which will come into force on 20 May 2013, follow a consultation process which was launched in July 20122.
To a significant degree, the proposed changes are intended to ensure that the trustees of a target company's pension plan(s) have broadly similar rights to those now afforded to its employee representatives following the major changes to the Code which were introduced in September 20113.
However, taken together with those changes the proposed amendments raise a key question, namely "Who is the Code intended to protect?", and represents a further shift away from its long-standing emphasis on ensuring that shareholders in target companies are treated fairly.
The main changes, and their implications, are outlined below.
Bidders will be required to disclose their intentions in relation to the target company's pension plan(s)
Under the new rules, a bidder will be required to state, in its offer document, its intentions with regard to the target company's pension plan(s).
This requirement will apply with respect to any occupational pension plan that:
- is a funded plan which is sponsored by the target company (or any of its subsidiaries);
- provides pension benefits, some or all of which are on a defined benefit basis; and
- has trustees (or, in the case of a non-UK plan, managers).
The new rules focus on plans which provide pension benefits on a defined benefit basis as these give rise to the potential for a funding deficit relative to the cost of providing the accrued benefits. As a result, the trustees (or managers) of such a plan will be concerned to understand the employer's intentions regarding the plan (including the funding of any deficit) and to have the opportunity to make known their views on the effect of the bid on the plan.
The new rules will apply to the target company's defined benefit pension plans on a group-wide basis. Their application will not be limited to UK plans.
The new rules will not, however, apply to "defined contribution" plans. However, employer contributions to defined contribution plans are typically made pursuant to the employees' employment contracts. As a result, those provisions of the Code which require the bidder to announce its intentions with regard to (among other things) any material changes in the conditions of employment of the employees of the target company, and which give the target company's employee representatives the right to give their opinion on the effect of the offer on employment, will apply in that situation4.
As regards the statement which a bidder will be required to make, the new rules will require it to state its intentions with regard to:
- employer contributions into any relevant pension plan (including with regard to the current arrangements for the funding of any plan deficit);
- the accrual of benefits for existing members of that plan; and
- the admission of new members to that plan, or make an appropriate negative statement.
They are therefore focused on the impact of the bid on the benefits which the plan provides to its members. They will not require a bidder to make statements with regard to covenant impacts (i.e. an assessment of the future ability of the target company to meet its funding obligations to the plan).
Taken together with the existing requirement for a bidder to disclose historical financial information and details of the financing of its bid, this change is intended to assist pension plan trustees in formulating their opinion on the effects of the bid on the target company's pension plan(s).
However bidders will need to carefully consider any such statement. Under the Code any statement of intention by a party to a bid relating to any action which it intends to take, or not take, after the end of the offer period, will ordinarily mean that the party making the statement would be regarded as committed to that course of action for a period of 12 months from the date on which the offer period ends, or for such other period as is specified in the statement, unless there has been a material change of circumstances5.
Provision of information to pension plan trustees
Under the new rules, parties to a bid will be required to make available to the trustees all the documents that they are each required to make available to the target company's employee representatives, including the announcement by the bidder of its firm intention to make an offer, the offer document, and the target's response statement.
Trustees' views on the effects of an offer on the plan
As mentioned above, the proposed changes are intended to ensure that, broadly, the trustees of a target company's pension plan(s) have similar rights to those now afforded to its employee representatives. Specifically, they give trustees the right:
- to have appended to a target company's board circular a separate opinion from the trustees on the effects of the bid (and any revised bid) on the pension plan, provided the opinion is received in good time before the publication of the circular; and
- where the opinion is not received in good time before the publication of the circular, to have the opinion published on a website and for the target company to be required to announce that this has been done.
Unlike employee representatives, the target company will not be required to pay the trustee's costs associated with doing so. However, in practice the trustee's costs in obtaining advice on the effects of a bid will usually be recouped from the plan employers either as part of the overall funding obligation, or as a separate plan expense.
Informing pension plan trustees of their rights under the Code
Under the new rules the trustees of the target company's pension plan(s) must be informed of their rights under the Code to make known the effects of the bid on the target company's pension plan(s).
Role of UK Pension Regulator
Finally, the Panel has resisted calls to give the UK Pensions Regulator a formal role in relation to takeover bids. Some respondents had argued that if the parties had not reached a definitive position on the target company's funding commitments regarding a pension plan by a certain point in the bid timetable, the Panel should be required to refer the matter to the Pensions Regulator.
Any decision to seek clearance from the Pensions Regulator remains a matter for the bidder (although UK defined benefit plan trustees remain free to approach the UK Pensions Regulator for guidance, or to discuss issues in relation to the process). This is to be welcomed.
Conclusion
Although the new rules apply to a target company's defined benefit plans worldwide they are very much influenced by the position in the United Kingdom and, in particular, the ongoing debate in relation to employer support of defined benefit pension plans.
In that context, the Panel's statement that "...trustees may wish to opine not only on the benefit impacts...but also, for example, on covenant impacts (i.e. the ability of the offeree company, having been acquired by the offeror, to make future contributions to the pension scheme)", recognises the key role which is often played by the trustees of a target company's UK defined benefit pension plan(s) in influencing the outcome of a bid (given the often considerable deficits in such plans), and the desirability, where possible, of early engagement between a bidder and plan trustees as part of the bid process.
Footnotes
1 RS 2012/2. See: http://www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/RS2012021.pdf .
2 PCP 2012/2. See: http://www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/PCP201202.pdf.
3 PCP 2011/1. See http://www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/PCP201101.pdf . For our analysis of those changes, see: http://friedfrank.com/index.cfm?pageID=25&itemID=6409
4 Rules 24.2(a)(i) and 25.9, respectively.
5 Note 3 to Rule 19.1.
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