Public Companies Update January 2006

2 PANEL PRACTICE STATEMENTS

The Panel on Takeover's and Mergers ('the Panel') has recently provided non-binding practice statements regarding schemes of arrangements and inducement fees.

2.1 Schemes of Arrangements

The statement, dated 9 November 2005, explained that the Executive of the Panel has applied the City Code on Takeovers and Mergers ('the Code') to schemes of arrangement (as described by s.425 Companies Act 1985) and highlights the following points:

The Offer Period

The offer period is defined in the Code as beginning when an announcement is made of a proposed or possible offer and ends when the offer becomes or is declared unconditional as to acceptances or the offer lapses. With a scheme of arrangement the date on which the offer ends can be problematic as the three key dates in a scheme are the date of the shareholders' meeting, the date of the court hearing and the date of the filing of the court order at Companies House. The last of these conditions is the filing at the Registrar of Companies and the Panel has stated that the offer period only closes on this date ('the Effective Date').

Note 1 rule 19.3

Note 1 to rule 19.3 makes it clear that any offer which contains statements which are unclarified e.g. that an offer is being considered, must be clarified before the latter stages of the offer period. The Executive usually specifies the latest date for clarification as being on or around 10 calendar days before the date of the shareholder's meeting. However, in certain circumstances (determined by reference to the circumstances) the Executive can push this date back until after the shareholder's meeting but prior to the date of the court hearing.

2.2 Inducement Fees between companies

An inducement fee is a fee paid by the offeree to the offeror if an event occurs that prevents the offer from proceeding or leads to its failure. The Code stipulates that the inducement fee must not exceed 1% of the offeree company's value (calculated by reference to the offer price). The statement, dated 9 November 2005, seeks to clarify the effect of this rule.

Agreements between the offeror and offeree company

The Panel has been consulted regarding a number of exclusivity or implementation agreements which impose a variety of restrictions on offeree companies such as non-solicitation and confidentiality obligations. These are in addition to the usual circumstances in which an inducement fee arises such as a higher offer being recommended by the offeree company board. In its practice note, the Executive has said that it regards payments for breach of such agreements as falling within rule 21.2 where it may have the effect of preventing the offer from proceeding or causes it to fail.

The executive should be consulted at an early stage with regard to such agreements and often the agreements should include the wording:

"nothing in this agreement shall oblige [the offeree company] to pay an amount which the Panel determines would not be permitted by rule 21.2 of the Takeover Code".

These words should be included in such agreements for clarification although the Executive recognises that payments for breaches which have not prevented the offer from succeeding or caused it to fail will fall outside rule 21.2.

Fully Diluted Share Capital

Whilst the Panel has previously stated that it is permissible for the 1% company value to be calculated by reference to the fully diluted equity share capital of the offeree company, the Panel stress that the value of options and warrants for the purpose of such calculations is their "see-through value", taking into account the offer and exercise price of the shares and only options and warrants which are "in the money" may be included.

Offeree Company confirmation

It is also necessary under Rule 21.2 that the offeree company board and its financial adviser confirm, in writing, to the Panel, that the inducement fee is in the best interests of the shareholders. The Panel have clarified that this confirmation can be given jointly in one letter signed by both or individually in two letters but that the adviser cannot give the confirmation on behalf of the board.

A copy of the Practice statements can be found at www.thetakeoverpanel.org.uk.

If you require further information on any matter covered in this note, please contact your principal contact at Charles Russell or Simon Gilbert, Clive Hopewell or Alexander Keepin (London), Francis Rundall, Richard Norton, or Adrian Mayer (Cheltenham), Catherine Drew or Geoff Sparks (Guildford) or Peter Elliott (Oxford) on 0207 203 5000.

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Please note that the summaries above are a general indicative guide only. They are not exhaustive. This information has been prepared by the firm as a service to our clients. As it is a general guide, we recommend that you seek professional advice before taking action. No liability can be accepted by the firm for any action taken or not taken as a result of this information. The firm is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are members of the Law Society. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide.