The Takeover Panel has never before censured a law firm over M&A advice, but last year it took the rare decision to publicly-criticise both Freshfields Bruckhaus Deringer and Holman Fenwick Willan (HFW).
The issue in question was the creation of Bumi, now Asia Resource Minerals, an Indonesian coal miner in 2010. Listed company Vallar struck a $3bn deal to acquire two companies from the Bakrie Group and Bukit Mutiara, which would bring the owners into the renamed group.
In 2012 the Takeover Panel ruled that the Indonesian parties had been “acting in concert” when they acquired shares carrying more than 30 per cent of the voting right in Vallar. In its recent public criticism of the incident, the panel claimed Bakrie and Bukit Mutiara’s adviser HFW “should have consulted the Panel about the concert party issue”, while Vallar’s adviser Freshfields also “could have done more regarding the concert party issue”.
The panel accepted there had been “no intention on the part” of the firms to “mislead the Panel”, but its first public criticism of the legal industry in its nearly 40-year existence shows just how seriously it viewed the matter. Yet another reason for the change could well be the increasing influence of lawyers in Takeover Panel issues, reflecting the shift in emphasis from bankers.
One corporate partner says there has been a trend over the last 15 years for lawyers to get more involved in such issues, putting lawyers “more in the driving seat”. Another source points out “they are now in the firing line”.
Shifting lines
The shift started after the panel itself came under some restructuring, with the establishment of a code committee and executive committee. Linklaters partner Richard Godden, who was the panel’s secretary in the late 1980s has recently been appointed to the Code Committee, whose function is to make the rules rather than implement them. While one body used to do both, the functions were separated in the wake of the Human Rights Act 1998 to ensure the panel remained “independent and impartial” when making and enforcing the rules.
“Commentators worked out it wasn’t really right to make the rules and implement them, so there’s a division between the committees,” explains one partner. “The regulatory regime has tightened up and the Code is now much bigger and more detailed compared to what it was.”
In fact a word commonly used by lawyers to describe the changing nature of the Code is that it has become “more legalistic”. In addition to the Human Rights Act, the environment around the panel has changed in terms of both political and social pressures leading to an increase in legal involvement.
One partner said these issues have led the Code to change from just being a “bankers’ pamphlet” to one with over 100 pages, so that global issues are taken into account, as well as those affecting domestic SMEs in the UK.
“The panel is very effective on the regulatory side, but it was a lot less international than it is now,” says one partner. “The market is a lot more global and it’s something the panel has to keep up with. This is a good thing for lawyers, as things such as sovereign wealth funds were never in the UK market so they need a lot of hand-holding to navigate their way round the Code.”
While new legislation and internationalisation have both contributed to the “legalistic” nature of the Code, it has also been affected by the increase in recommended bids offers, which have forced lawyers to take more of an active stance. This means law firms are becoming “more experienced” than the bankers at handling M&A issues, as “the role of the bankers has changed and it’s not necessary to expect the bankers to be technical in the Code”, according to the partner.
Lawyers are handling complicated takeover issues, such as the “cold-shouldering” sanction used in 2010 against several parties that had tried to circumvent a Code requirement to make an offer to shareholders of Principle Capital Investment Trust.
There has also been the recent timetabling issue on CSC’s takeover offer for Xchanging, which was recently heard in the Takeover Appeal Board. It is very rare for decisions to be heard in this body, but the matter concerned the time allowed to announce a firm intention or withdrawal in a bid involving multiple different parties such as CSC, Ebix and Capita.
Impact of censure
In the case of Freshfields and HFW, most partners accept that both teams were “working under significant client pressure” and “working on a difficult deal”. But partners also use the word “embarrassing”.
One says: “Freshfields is a big adviser to the panel and so it will be an embarrassment to them.” Another remarks the magic circle firm “will be embarrassed and it is a bit of a black spot”.
Yet what will the impact be on one of the largest corporate powerhouses in the UK? “Are Freshfields pleased about it? No they’re obviously not,” comments one partner. “But how often do their clients look at the press?”
This is the view among many corporate partners who doubt whether Freshfields’ longstanding clients will really move away from the magic circle firm as a result of its censure from the Takeover Panel. The example of Kraft and Cadbury was also alluded to, as Clifford Chance client Kraft came under pressure for agreeing to keep a factory open in Somerton but then closed it once it won the bid in 2012.
“There was a revision of the rules and there was a lot of noise about preserving British industries,” says one partner. “But was Clifford Chance’s corporate practice affected after Kraft? I think there will be an effect for Freshfields, but I’m not sure how much.”
Instead the case of Freshfields and HFW has raised questions over the power of the panel, which is described as a “quaint organisation” compared to other regulators. As an independent body, the panel does not have the power to fine companies or people, instead issuing and administering the Code, as well as regulating all transactions fairly.
“The panel tries to be a referee of the process an you have to play by the rules,” observes one partner. “Institutions have to care about their relationships with the panel, while the panel itself needs to be mindful of how people view the market and be sensitive to the issues.”
Lawyers in fact are are not even liable to ensure their clients understand the Code, with the majority of partners agreeing that not fining Freshfields and HFW was a good idea. Instead the Code states that “financial advisers…have a particular responsibility to comply with the Code”, explaining that taking legal advice “on the interpretation, application or effect of the Code is not an appropriate alternative to obtaining a ruling from the Executive”.
Financial advisers are therefore still paramount to the working of the Code, with Crédit Suisse also censured by the panel in its criticism of the Bumi case.
“If there’s a cock-up then the advisers will be bankers and they’re told off for doing something wrong,” remarked another corporate partner. “For instance, there’s also a requirement for banks to detect a leak of a takeover and they’re able to spot this within minutes. They have trading floors showing share price movements on Bloomberg screens and the bankers are expected to be on it.”
So without any statutory obligation on them, law firms have tended to avoid censure from the Takeover Panel. However, things could well be changing as the lawyers take more of an active role.
“Law firms are doing more than they used to, so lawyers will bump up against the panel,” explains one partner. “It was a difficult deal and proof that law firms are not outside the panel. They were not happy with how they had been approached and the firms won’t be the last to be affected.”