Potential bidders in a takeover often try to reduce execution risk and protect their commercial interests by asking the target company to sign an NDA and/or a bid conduct agreement, and target directors to sign irrevocable undertakings to accept the offer (or to vote in favour of the scheme of arrangement). Rule 21.2 of the Takeover Code imposes strict controls on such agreements, and other commitments given by the target or persons acting in concert with it that could deter competing bidders from making an offer or lead them to offer less favourable terms.
Following attempts by some parties to push the boundaries of what is permitted, the Panel has published guidance on which types of agreements and commitments, and individual provisions within them, are prohibited and which are permitted.
At the same time, the Panel has set out the circumstances in which a target company will not have to provide to a competing bidder, who may be less welcome, commercially sensitive information that it has previously provided to another bidder to enable it to analyse the competition law implications of the merger.
Rule 21.2: offer-related arrangements
Rule 21.2(a) of the Takeover Code provides that, except with the consent of the Panel, neither the target nor any person acting in concert with it (e.g. a target director or a 20% shareholder) may enter into an "offer-related arrangement" with either the bidder or any person acting in concert with it during an offer period or when an offer is reasonably in contemplation. Rule 21.2(b) defines an "offer-related arrangement" very widely as any agreement, arrangement or commitment in connection with an offer, including any inducement fee arrangement or other arrangement having a similar or comparable financial or economic effect.
Rule 21.2 was introduced in September 2011 following concerns that it had become standard practice in the context of recommended offers for bidders to insist on various deal protection measures which could have detrimental effects for target shareholders by (i) deterring competing bidders from making an offer, thereby denying target shareholders the possibility of deciding on the merits of a competing offer; and/or (ii) leading to competing bidders making an offer on less favourable terms than they would otherwise have done. For further details see the Law-Now article "Changes to the Takeover Code on 19 September 2011".
Rule 21.2 therefore does not prohibit agreements and commitments that impose obligations only on a bidder or any person acting in concert with it, other than in the context of a reverse takeover. For example, it does not prohibit a bidder agreeing to pay a "reverse" break fee to the target - e.g. if the transaction does not complete as a result of a failure to obtain regulatory clearances or the approval of bidder shareholders – such as the reverse break fee of US$ 3 billion agreed to by Anheuser-Busch InBev as part of its possible offer for SABMiller.
Certain agreements and commitments are excluded from the prohibition by Rule 21.2(b).
Since Rule 21.2 was introduced, a number of parties and their advisers have sought to push the boundaries of what is permissible. Although the Panel does not generally review at their draft stage agreements between the target and its concert parties on the one hand and the bidder and its concert parties on the other (such as bid conduct agreements and irrevocable undertakings to accept the offer), the Panel has been routinely reviewing such agreements and undertakings once they have been published on the website of the bidder or target. On occasion the Panel has found them to include provisions that, in its view, breach Rule 21.2, and it has previously warned that it will take disciplinary action against parties and their advisers if they intentionally flout the Rule.
In light of these experiences, the Panel has now published further guidance in Practice Statement 29 on the types of agreements and commitments, and individual provisions within them, that are prohibited by Rule 21.2 (blacklisted) and those that are permitted (whitelisted). The most important points are highlighted below.
Commitments to maintain the confidentiality of information
Under Rule 21.2(b)(i) a target is permitted to enter into a confidentiality agreement which requires it to keep information that it may receive from a bidder or potential bidder confidential, provided the agreement does not include any other provisions prohibited by Rule 21.2(a). Such information could include, for example, information relating to a bidder which the target requires in order to conduct due diligence on the bidder in the context of a securities exchange offer; the fact that a particular party may be interested in making an offer; or the price or other terms on which such an offer might be made.
But there is an important caveat: under Rule 2.3(d) a bidder or potential bidder may not seek to prohibit the target from making an announcement "relating to" a possible offer, or from publicly identifying the potential bidder, at any time the board considers appropriate. The Panel has clarified that this means that the target must always be free, if it chooses to do so, to announce the fact that it is in talks, the identity of the potential bidder, and the price or range of prices and any other terms that have been discussed.
Commitments to provide information or assistance for the purpose of obtaining any official authorisation or regulatory clearance
Rule 21.2(b)(iii) permits a target to enter into a commitment with a bidder to provide information or assistance for the purposes of obtaining "any official authorisation or regulatory clearance". The Panel interprets this to comprise authorisations and clearances from governmental and regulatory bodies that are required as a condition of the offer (e.g. the consent of a competition authority). In addition, where the approval of the offer by the bidder’s shareholders is required or, if the offer is a securities exchange offer, where the bidder is required to obtain the approval of a regulatory body in relation to a prospectus, circular or other similar document which the bidder is required to publish, the Panel considers that the target would be permitted to enter into a commitment to provide information relating to the target to the extent that such information is required to be included in the relevant document in order to obtain any required approval of the document from a relevant authority.
However, Rule 21.2(b)(iii) does not permit agreements, arrangements or commitments to assist with other matters, such as assistance with a bidder’s application to a tax authority in order to obtain a specific tax treatment or with the preparation of a bond prospectus which the bidder may be required to publish in relation to refinancing the bank facilities which provide the cash consideration payable under the offer. A target may, if it so wishes, provide assistance to the bidder in relation to such matters, but the target is prohibited by Rule 21.2 from entering into an agreement, arrangement or commitment to do so.
Also not permitted is a commitment by the target to pay all or part of the costs of the bidder in obtaining an official authorisation or regulatory clearance.
Directors’ irrevocable commitments and letters of intent
The prohibition in Rule 21.2(a) extends to offer-related arrangements entered into between a director of the target (being a person acting in concert with the target) and a bidder. However, Rule 21.2(b)(iv) provides that irrevocable commitments and letters of intent are excluded from the definition of an offer-related arrangement.
The Panel has clarified that Rule 21.2(b)(iv) permits a target shareholder who is also a director of the target to enter into an irrevocable commitment or letter of intent to accept an offer (or to vote in favour of a scheme of arrangement) with respect to the shares in the target held or controlled by the individual concerned. However, a target shareholder who is also a director of the target may not enter into other kinds of offer-related arrangements with the bidder or any person acting in concert with the bidder, especially where they relate to the individual’s role as a director. In this area there is perceived to have been significant non-compliance.
The following types of undertakings in irrevocables given by target directors are regarded by the Panel as prohibited:
- not to solicit a competing offer;
- to recommend an offer to target shareholders;
- to notify the bidder if the director becomes aware of a possible competing offer or the terms of a possible competing offer;
- to convene board meetings and/or vote in favour of board resolutions which are necessary to implement the offer;
- to provide information in relation to the target for due diligence or other purposes (or to provide a warranty in respect of any such information);
- to assist the bidder with the satisfaction of its offer conditions;
- to assist the bidder with the preparation of its offer documentation; and
- to conduct the target’s business in a particular manner prior to an offer becoming wholly unconditional.
Note, however, that there is nothing to stop a target director doing any of these things voluntarily, provided doing so is consistent with his duties to the target company and not contrary to any other rules of the Code.
The following types of provisions in irrevocables given by target directors are regarded by the Panel as permitted:
- undertakings not to dispose of the shares or withdraw an acceptance of the offer;
- undertakings to elect for a particular form of consideration when alternative forms of consideration are offered; and
- representations regarding title to the shares to which the irrevocable relates.
Bid conduct agreements
Sometimes the bidder wants the target to enter into an agreement governing the conduct, implementation and/or terms of an offer (a bid conduct agreement). Such an agreement will be an "offer-related arrangement". It is therefore important that the agreement only contains provisions which are permitted by one of the exclusions listed in paragraphs (i) to (vii) of Rule 21.2(b).
The following types of provisions in bid conduct agreements are regarded by the Panel as prohibited:
- an obligation on the target to co-operate with the bidder in implementing the offer or to assist with the preparation of the offer documentation (except to the extent the information is required for a prospectus or circular in the circumstances described above inCommitments to provide information or assistance for the purpose of obtaining any official authorisation or regulatory clearance);
- an obligation relating to the conduct of the target’s business prior to an offer becoming wholly unconditional (or a scheme becoming effective);
- a warranty in relation to information which is provided by the target to the bidder;
- a commitment by the target to publish a scheme document by a certain date or to hold meetings by a certain date. However, the parties to the offer are permitted to include within the conditions to the scheme a long-stop date by which the scheme must become effective and certain other conditions specified in Appendix 7 of the Code;
- a restriction on the target’s ability to make announcements or to communicate with shareholders or others in relation to the offer (see Commitments to maintain the confidentiality of information above);
- a restriction on the payment of dividends by the target; and
- an obligation on the target to assist the bidder with integration planning.
Rule 21.2 does not prohibit a target from entering into an agreement, arrangement or commitment which is conditional upon the offer becoming or being declared wholly unconditional, because this will not have the effect of deterring a competing bidder; nor does it prevent the target doing any of these things voluntarily.
Parties’ agreement to disregard any provision that offends Rule 21.2
In case the Panel objects to any provision of a bid conduct agreement, it recommends that the following clause should be included:
"The parties agree that, if the Takeover Panel determines that any provision of this agreement that requires the offeree company to take or not to take action, whether as a direct obligation or as a condition to any other person’s obligation (however expressed), is not permitted by Rule 21.2 of the Takeover Code, that provision shall have no effect and shall be disregarded.".
Agreements relating to any existing employee incentive arrangement
Rule 21.2(b)(vi) provides that any agreement relating to any existing employee incentive arrangement is excluded from the prohibition on offer-related arrangements. The Panel interprets Rule 21.2(b)(vi) as only permitting an agreement relating to how existing awards under the target’s employee incentive arrangements will be treated in connection with the offer. For example, the parties to an offer would be permitted to agree how any discretion on the part of the board of the target, or its remuneration committee, will be exercised in relation to the number of shares to be issued in respect of existing share-based incentive awards, in order to provide certainty to the parties to the offer and to the employees in question regarding the number of shares to be issued under those awards.
But an agreement that the target will not grant any new options to employees under its established share option schemes is not permitted. Similarly, a target cannot enter into agreements, arrangements or commitments relating to other aspects of employee remuneration or incentives, for example the payment (or non-payment) of bonuses or salary increases.
Withdrawal of previous Practice Statements
Practice Statement 23, which dealt with inducement fees and other offer-related arrangements, and Practice Statement 27, which dealt with directors’ irrevocable commitments and letters of intent, have each been withdrawn as they have been superseded by the new Practice Statement 29.
It seems clear that any further attempts to push the boundaries of Rule 21.2 are likely to result in the Panel taking disciplinary action against each party concerned and its advisers. If there is any doubt about whether a proposed agreement or commitment is caught by the Rule, the parties should consult the Panel at the earliest opportunity, and certainly before the agreement or commitment is entered into.
Rule 20.2: equality of information to competing bidders
Rule 20.2 provides:
"Any information given to one offeror or potential offeror [Bidder 1], whether publicly identified or not, must, on request, be given equally and promptly to another offeror or bona fide potential offeror [Bidder 2] even if that other offeror is less welcome. This requirement will usually only apply when there has been a public announcement of the existence of the offeror or potential offeror [Bidder 1] to which information has been given or, if there has been no public announcement, when the offeror or bona fide potential offeror requesting information under this Rule [Bidder 2] has been informed authoritatively of the existence of another potential offeror."
The Rule is designed to ensure that a competing bidder (Bidder 2), who may be less welcome in the eyes of the target board, is not dissuaded by an information asymmetry from bidding for the target, thus depriving target shareholders of the opportunity to consider another, potentially more favourable, offer.
In passing information to Bidder 2, the target must not impose any conditions other than those relating to: (i) the confidentiality of the information passed; (ii) reasonable restrictions forbidding the use of the information passed to solicit customers or employees; and (iii) the use of the information solely in connection with an offer or potential offer. Any such conditions imposed must be no more onerous than those imposed upon any other bidder or potential bidder. This means, for example, that the target cannot compel Bidder 2 to enter into a standstill undertaking relating to target shares, even if it required Bidder 1 to do so; but there is nothing to stop Bidder 2 giving such an undertaking voluntarily.
Information provided to Bidder 1 to enable it to analyse how the transaction would impact on competition and to approach the relevant competition regulators: modification of Rule 20.2
Where a merger between the target and Bidder 1 could come within the scope of EU or national competition law, Bidder 1 will often want to do some detailed analysis as to the potential impact on competition in each of the relevant markets for the purpose of deciding whether merger clearance needs to be sought and, if so, what information the submission should contain. Bidder 1 may therefore ask the target to provide it with certain commercially sensitive information (Restricted Information) – for example, about pricing strategies, market share, and planned new activities.
If Bidder 2 were then to ask the target to provide it with specified categories of information that included the Restricted Information, the target would be required by Rule 20.2 to do so.
However, in Practice Statement 30 the Panel has clarified that if Bidder 1 engages a team of third party lawyers or economists, on an "outside counsel only" basis, to consider the need for and, if necessary, obtain the consent of a competition authority or other regulatory body (i.e. a clean team), and Bidder 2 then asks the target to provide it with Restricted Information, the Panel may allow the target to provide the Restricted Information to a similar clean team engaged by Bidder 2, instead of to Bidder 2 itself. To obtain this dispensation, which effectively modifies Rule 20.2, both Bidder 1 and Bidder 2 will have to satisfy certain conditions in respect of their own clean team, including:
- The bidder’s clean team must be set up and operate in a way that is clearly separated from the bidder itself. As a minimum, Restricted Information must be stored in protected files accessible only by members of the clean team.
- The clean team must not include any director or employee of the bidder, or any other adviser to the bidder, and the bidder will have to confirm to the Panel thast none of its directors or employees will have access to the Restricted Information until the offer becomes wholly unconditional.
- The Panel will want to be provided with a list of the key individuals on the clean team: the number should be kept to an "absolute minimum")
- The Panel will require confirmation from each firm represented on the clean team that effective information barriers (Chinese walls) and procedures have been put in place to ensure that information provided to or generated by the clean team is kept separate from the bidder and its other advisers, particularly those advisers who are involved with the takeover. One individual at each firm represented on the clean team will have to take primary responsibility for ensuring the integrity of the separation arrangements at their firm.
- None of the clean team may disclose to the bidder or anyone outside the clean team any Restricted Information or any other information that enables a person to deduce the Restricted Information. Sometimes this may require the clean team to redact information from application forms and correspondence with regulatory authorities before it is sent to the bidder.
- Where the clean team comprises individuals in different firms or offices in relevant jurisdictions, all advice to be provided to a bidder by any member of the clean team should be reviewed in advance by a designated responsible member of the clean team at the principal firm advising on the relevant regulatory issues to ensure that no Restricted Information (or other information that would enable someone to deduce the Restricted Information) is disclosed to the bidder.
- To ensure that Restricted Information is not passed to the bidder by a competition authority,the bidder will (unless all discussions with the authorities are conducted exclusively by the clean team) have to explain the separation arrangements to each authority and satisfy itself that the authority will not do anything to compromise them.
- If any information does leak from its clean team to Bidder 1 or any of its other advisers, the Panel must be informed promptly. Usually, the Panel will withdraw the dispensation so that, upon request, the target will have to provide the Restricted Information to Bidder 2 itself.
A target is not obliged to provide a bidder with any information; but if it chooses to do so then, as a general rule, it must on request, provide any competing bidder with the same information. The prospect of commercially sensitive information ending up in the hands of a rival bidder, particularly one that is a trading competitor, even under conditions of confidentiality, can make both bidders and targets reluctant to ask for or disclose such information. The Panel’s guidance should reduce these concerns and make it easier for potential bidders, through a clean team, to do more detailed competition law analysis before making an offer. In turn, this should give both parties a more informed view of which competition clearances are likely to be required, and what types of remedies may be ordered or undertakings given, and of the risk of the potential merger being prohibited outright by competition authorities.
More generally, the Panel’s guidance reflects an increasing trend of using clean teams in due diligence for M&A transactions in order to protect commercially sensitive information and mitigate competition law risk. As such, the conditions set out in Practice Statement 30 may become the benchmark for establishing and operating clean teams outside the context of Code-regulated takeovers.