The general approach of the City Code on Takeovers and Mergers (the Code) is to treat public statements made by parties to an offer as binding upon them. Accordingly, it is imperative that listed companies and their advisers understand their announcement obligations under rule 2 of the Code, the distinction between “firm offer announcements” (commonly known as Rule 2.7 Announcements) and “possible offer announcements” (commonly known as Rule 2.4 Announcements), as well as the permissibility and enforceability of conditions to an offer.
Rule 2.7 Anouncements
A “firm offer” or a “firm intention to make an offer” may only be announced after careful and responsible consideration which gives a Bidder every reason to believe that it can implement the offer and will continue to be able to do so. In particular, if the consideration includes a cash element, the Bidder will need to have the cash resources available to satisfy full acceptance of the offer. Where the cash is coming from bank financing or other third parties, the facility will need to be committed and ready to drawdown from the date of the Rule 2.7 Announcement.
The 2.7 Announcement must include prescribed content including detailed terms of the offer, all conditions and any pre-conditions, a cash confirmation statement and details of any irrevocable commitments or letters of intent.
Crucially, any pre-conditions are limited principally to regulatory approvals and both the conditions and pre-conditions will be subject to rule 13 of the Code (see more on this below). In fact, the Panel on Takeovers and Mergers (the Panel) must be consulted in advance if a Bidder proposes to include in a Rule 2.7 Announcement any pre-condition, condition or pre-condition which relates to financing, or any conditions which are not entirely objective.
The final key implication of a Rule 2.7 Announcement is that it will trigger the formal Code timetable under which the offer document will need to be posted within 28 days and must become unconditional as to acceptances by midnight on the 60th day after the day the initial offer document is published.
Rule 2.4 Announcements
A “possible offer announcement” under rule 2.4 can arise in three different scenarios and be:
- mandatory where rule 2.2 requires either the Bidder or the Target to make an announcement;
- voluntary where a Bidder wishes to make public its interest; or
- voluntary where a Target wishes to “out” a Bidder.
Other than a requirement to name the Bidder, stipulate the “Put Up or Shut Up” (PUSU) deadline and set out the standard Rule 8 regulatory disclosure rubric, there are no particular content requirements for a Rule 2.4 Announcement. In fact Rule 2.4 is relatively permissive.
A mandatory announcement in order to comply with Rule 2.2 (as at (1) above) may be very short. When the announcement is in response to rumour and speculation, or where there is an untoward movement in the share price of the company, parties often choose to say as little as possible beyond merely confirming that talks are taking place.
Where things can get a lot more interesting (and the bear traps arise) is in scenario (2) above, where a potential Bidder, in an attempt to put pressure on the directors of the Target, may seek to articulate the merits of a possible transaction and outline the terms on which it would be prepared to make an offer. A particularly good example of this approach being used was Pfizer’s April 2014 announcement relating to a possible offer for Astra Zeneca (AZ), which was then followed by two further Rule 2.4 Announcements.
When used strategically in this way, a Rule 2.4 Announcement should include pre-conditions, and Bidders have discretion as to what they might be (although the Panel will need to be consulted in advance).
The most common pre-conditions are that any bid will be subject to completion of satisfactory due diligence, the recommendation of the Target directors and the receipt of irrevocable undertakings to accept the offer from the Target directors. Pfizer used these pre-conditions to effectively reserve its position whilst appealing directly to AZ shareholders in an attempt to force the directors of AZ to engage in merger discussions. As history shows, the strategy in that particular case did not work.
Reservation of rights
It is very important to note that under Rule 2.5, statements included in a Rule 2.4 Announcement relating to the terms on which an offer might be made will be binding unless the Bidder expressly reserves its right to set them aside in certain circumstances.
Similarly, statements as to price, or a particular exchange ratio, will set a floor to any consideration subsequently offered unless a specified event occurs which enables a Bidder to set aside a statement. Significantly, if the Bidder says that the possible offer “will not be increased” or is “final” (or some similar expression), it will not subsequently be allowed to make an offer on better terms.
It is therefore critical that well drafted reservation wording is included which permits a Bidder to set aside statements and thereby adjust the terms of an offer if, for example:
(i) a third party announces an offer for the Target;
(ii) the Target board agrees to a lower price;
(iii) the Target announces a "whitewash" transaction; or
(iv) the Target declares or pays a dividend.
The Bidder should also consider reserving its right to introduce other forms of consideration and/or vary the mix of the consideration (e.g., as between cash, shares and any loan notes).
Broadly, conditions fall into four categories:
- the acceptance condition, which is the minimum threshold of shareholder acceptance below which the Bidder will not proceed;
- competition/anti-trust clearances;
- other effectively mandatory conditions, for example a listing condition on a securities exchange offer; and
- other conditions included for the benefit of the Bidder and intended to give it a right not to proceed in certain circumstances, for example, a material adverse change (MAC) condition, or a condition around no undisclosed litigation.
It is conditions falling into the fourth category above which require the most thought and analysis because unlike in a private M&A deal where a breach will enable the buyer not to proceed, in a public M&A deal the Bidder’s ability to invoke any such condition is in fact very limited.
The general position under the Code is that offer conditions must not normally be in subjective terms. This is a significantly limiting factor because “materiality” is often not something which can be easily defined in objective terms. Furthermore, rule 13.5(a) of the Code explicitly provides that, except for the conditions at 1 and 2 (and in practice 3) above:
“An offeror should not invoke any condition … so as to cause the offer not to proceed, to lapse or to be withdrawn unless the circumstances which give rise to invoke the condition … are of material significance to the offeror in the context of the offer.”
Rule 13.5(a) is designed to prevent bidders from invoking widely drafted, albeit objective, conditions. This is also in relation to a condition covering specific circumstances. The meaning of this rule was considered by the Panel on appeal during WPP Group plc’s 2001 offer for Tempus Group plc. The particular condition in question was a MAC condition – WPP was of the view that there had been a material adverse change in the prospects of Tempus following the events of 9/11 in the United States. The Panel concluded that the test of “material significance” was not met and its decision stated that:
“meeting this test requires an adverse change of very considerable significance striking at the heart of the purpose of the transaction in question, analogous … to something that would justify frustration of a legal contract”.
In Practice Statement No. 5, the Panel have clarified that whilst the standard to invoke a condition is a high one, the best does not require the Bidder to demonstrate frustration in the legal sense. In considering whether a particular matter should give rise to a right to invoke, the Panel Executive’s practice is to take into account all relevant factors, including whether the condition was:
- the subject of negotiation with the Target;
- expressly drawn to Target shareholders' attention in the offer document or announcement, with a clear explanation of the circumstances which might give rise to the right to invoke it; and
- included to take account of the particular circumstances of the Target.
As one will see from the above, the ability to invoke a condition will be, in practice, “challenging” to say least and accordingly the working assumption for Bidders should be that shareholders and the market expect that protective conditions will not be invoked and that once a firm offer has been made, unless the acceptance or regulatory conditions referred to at 1 to 3 above are not satisfied, it will have to complete the transaction.