The Takeover Panel has finalised its new regime for regulating statements of intention made by bidders and targets. The regime distinguishes between post-offer undertakings (or POUs), which are binding commitments, and statements of intention, which are not binding. The changes take effect today, Monday 12 January 2015.
- Background – Kraft/Cadbury and Pfizer/AstraZeneca
- The new regime
- Post-offer undertakings
- Post-offer intention statements
- What impact will the new regime have?
1. Background – Kraft/Cadbury and Pfizer/AstraZeneca
Kraft Food Group Inc’s controversial £11.5bn takeover of Cadbury plc in 2010 received significant public attention. As well as there being general concern about whether the takeover regime in the UK was too favourable to hostile bidders, statements made by Kraft in the course of the offer also attracted controversy.
Kraft had stated in the course of the offer that it intended to keep Cadbury’s Somerdale factory open (which Cadbury had said it planned to close). However, following the offer, and on the basis of further information, Kraft decided to close the factory, resulting in 500 job losses.
The bid led to wide-ranging reforms to the Takeover Code - in particular, one provision introduced into the Code in September 2011 provided that any party making a statement of intention during the course of an offer about action it intended to take following the offer would be held to that statement for a period of 12 months after the end of the offer period (Note 3 to Rule 19.1).
The high profile approach by Pfizer Inc for AstraZeneca plc last year brought this provision under scrutiny. The deal sparked a frenzy of interest from the UK public, Parliament and media, all of whom were very keen to understand Pfizer’s future intentions for the business.
In response to, and to forestall further, negative press speculation about the extent to which the drive for synergies would threaten UK-based pharmaceutical R&D, Pfizer published a series of wide-ranging commitments, including that it would develop a R&D hub in Cambridge and maintain 20% of its R&D employees in the UK. Pfizer’s statement was unusual in that it expressed its statements as binding commitments rather than an intention, said it would abide by the commitments for at least five years and set them out in a letter to the Prime Minister and to a Parliamentary select committee.
Even though the offer ultimately failed due to disagreement on price, Pfizer’s statements sparked debate about the powers of the Takeover Panel to enforce such statements and how it might use those powers.
2. The new regime
The Takeover Panel has introduced a new bifurcated regime, distinguishing between post-offer undertakings and statements of intention, which helpfully clarifies when a party to an offer will be bound by the statements it makes.
Rule 19.1 of the Takeover Code requires that all documents and information published and statements made during the course of an offer must be prepared with the highest standards of care and accuracy. Under the new regime, statements about action that a party intends to take after the end of an offer period will be subject to additional regulation. The regime distinguishes between two forms of statements:
- ‘post-offer undertakings’, which are binding on the party; and
- ‘post-offer intention statements’, which are not.
The rule changes take effect today, Monday 12 January 2015. Statements made prior to that date will continue to be governed by the old regime, including Note 3 on Rule 19.1 which provides that a party will be held to a statement of intention for 12 months (or such other period specified).
The response statement RS 2014/2 is available on the Takeover Panel's website.
3. Post-offer undertakings
Post-offer undertakings, or POUs, are binding commitments made voluntarily by a party to an offer relating to action they will take following the offer. The party providing the post-offer undertaking will be required to comply with the terms of that undertaking for the period of time specified in the undertaking.
A party wishing to make a post-offer undertaking must:
- consult the Panel before making the undertaking;
- make it clear that it is a post-offer undertaking;
- specify the period for which the commitment is made; and
- state any qualifications or conditions.
Whilst a party may qualify a post-offer undertaking, any qualifications or conditions must be specific and precise (much like conditions to a takeover offer) and the Panel will not permit general qualifications relating to a material adverse change, unspecified force majeure or directors’ fiduciary duties. Parties will, however, be allowed to include a qualification or condition which provides that a post-offer undertaking will no longer apply where the Panel determines that the party is unable to comply with the post-offer undertaking as a result of an event beyond the party's control.
Post-offer undertakings will be treated, and strictly enforced, by the Panel as binding commitments. In support of the Panel's enforcement powers, the party must:
- provide written reports to the Panel to confirm compliance with the undertaking; and
- if the Panel so requires, appoint an independent supervisor to monitor compliance.
Ultimately, the Panel is able to obtain an order from the High Court to seek compliance with the commitment.
The Panel has clarified that a party's advisers do not have on-going responsibility to ensure compliance with a post-offer undertaking after the end of the offer period. They will however be expected to provide advice at the time a POU, or intention statement, is made as to the requirements for, and consequences of, making the undertaking or statement.
4. Post-offer intention statements
Post-offer intention statements are statements relating to action a party intends to take following the end of the offer period. The party will not be treated as being committed to comply with the intention expressed in the statement but the Code does impose standards on a party when making a statement of intention.
A post-offer intention statement must, when made, be both:
- an accurate statement of that party’s intention at the time that it is made (a subjective test); and
- made on reasonable grounds (an objective test).
Whilst this will give rise to an expectation that the party will take that course of action, it will not be forced to. If the party decides not to follow the intended course of action in the 12 months following the end of the offer period, it must consult the Panel and an announcement may be required. Failure to comply is not a breach of the Code but if the Panel concludes that the party did not meet one of the tests described above when it made the statement, the Panel's usual sanctions will be available to it (for example, public or private criticism).
5. What impact will the regime have in practice?
Parties who volunteer post-offer undertakings will be bound by them, will have to report to the Panel and their conduct may be monitored. If a party wishes to avoid being bound in future as a result of a change of circumstances it will need to specify those circumstances at the time it gives the POU. As there is no obligation under the Code to give a POU, why would anyone make such a commitment?
We suggest that there will be scenarios where POUs might well be considered to be desirable by a bidder. POUs may lend additional credibility by addressing particular concerns arising from a transaction in order to convince shareholders and stakeholders to support it, as Pfizer sought to do in connection with its possible offer for AstraZeneca. However, parties will have to think carefully about the wording of the undertakings and in particular any carve-outs or qualifications they wish to attach to the undertaking. The Panel has said that the obligation to comply with a POU is a higher standard than an obligation to use all reasonable efforts to comply. It has also said that a party giving a POU must not take any action that has the effect of triggering a qualification or carve out. For these reasons, we expect that POUs volunteered by bidders will be confined to unusual or specific circumstances, such as mentioned above, or for example where a bidder is not looking to acquire 100% of a target and is prepared to provide a POU to maintain a listing.
It will also be interesting to see whether the POU regime will prove to be something actively sought after by target boards, conscious of their duties to have regard to wider stakeholder interests when considering whether to recommend an offer, and potentially seeking to extract a POU from a bidder as part of the commercial terms of a deal.
It is also important to note that the regime applies equally to statements by targets as well as bidders. Target boards often make statements, in defence of an unsolicited approach or a hostile bid, about their intentions for the target business after the expiry of the offer period. For example, a target board may say that it will increase dividends or make a return of capital. Whilst a POU may appear more effective when seeking to persuade shareholders not to accept an offer, a board will have to think carefully about the ramifications if it chooses to make a POU, rather than a statement of intention, and what carve-outs it should attach to any such undertaking. In practice, a statement of intention is likely to be the safer course of action, given that the directors will not be able to include a carve-out to make compliance with the POU subject to their fiduciary duties for example. Even then, target directors will be answerable to their shareholders at the next AGM, in the usual way.
As regards post-offer intention statements, the deletion of the provision (in Note 3 on Rule 19.1) that any such intention statement is binding for 12 months might encourage bidders to be more open in disclosure of their plans for the target business, including the employees, without fear that such statements will unduly constrain the operations of the enlarged group.