Northern victim of 'flat-fee' confusion

Northern Electric lost its independence to the US utility CalEnergy because of a misunderstanding of the term ‘flat-fee’ arrangement. This, in effect, is the conclusion of a three-month investigation by the Takeover Panel into BZW and its conduct on behalf of Northern.

But the panel’s report found BZW’s fees themselves were not in breach of the Takeover Code. The investment bank only fell foul of that part of the code which says companies and their advisers must consult the panel executive ‘when there is any doubt whatsoever’ as to whether a course of action is in accordance with the rules.

In November, BZW negotiated a #250,000 performance-related fee, payable at the discretion of Northern’s board. Part of the agreement was that if Northern decided to pay it would do so before knowing if it had won the bid, since a successful bidder probably would not pay.

On 17 December, with the closing date fast approaching, BZW asked the panel for permission to buy shares in Northern in an attempt to scupper CalEnergy. Permission was given, provided that BZW received no financial ‘inducement’ to do so. The written statement from the panel executive to BZW confirmed ‘there would be no change in the flat-fee basis’ of BZW’s remuneration.

Two days later, BZW asked the panel to clarify what was meant by the words ‘flat-fee basis’. It had already bought #20m of Northern shares.

The panel later accepted it was a coincidence that on the same day Northern agreed to pay the #250,000 fee.

At a meeting on 20 December, BZW argued its fees were ‘flat’ in the sense that they were not dependent on Northern defeating CalEnergy’s bid.

The full panel decided that the bid deadline must be extended by two days because, as director general Alistair Defriez told Accountancy Age: ‘The market had been operating for two days without the knowledge that there was such an arrangement.’ This gave CalEnergy enough time to secure victory over Northern.

See Alistair Defriez profile, page 10.