Commitments made by SoftBank as part of its offer for ARM Holdings to preserve ARM’s UK employee base will test for the first time rules on “post-offer undertakings” that were introduced into the Takeover Code last year following Pfizer’s aborted possible offer for AstraZeneca.
Background and Code rules
On that bid, Pfizer made certain public commitments to continue various aspects of Astrazeneca’s lifesciences activities in the UK, which resulted in much debate about how binding those commitments actually were. Shortly afterwards, the Takeover Code was amended so that where an actual or potential bidder or target intends to make a statement during an offer period about a future course of action that it proposes to take or not take, it must decide whether it wishes to make either:
- A firm, binding commitment (known as a “post-offer undertaking”) governed principally by Rule 19.7 of the Code. Among other things, such an undertaking must specify any period of time for which it applies or any deadline by which the course of action will be completed, and prominently state any qualification or conditions to which it is subject. Under Rule 19.7(c), such qualifications or conditions, and all other terms of the undertaking, must be “specific and precise”, “readily understandable and capable of objective assessment” and “not depend on subjective judgements of the party to the offer or its directors” (much like conditions to an offer). A party proposing to make a post-offer undertaking must consult the Panel in advance. Commitments or undertakings given to an identified party, such as a regulator, are not treated as post-offer undertakings that can be enforced by the Panel; or
- A statement of intention (known as a “post-offer intention statement”), governed principally by Rule 19.8. Such a statement must be an accurate statement of the party’s intentions at the time that the statement is made and based on reasonable grounds. A party making a post-offer intention statement is not bound to implement the intended course of action but, if it changes its mind, it must make an announcement explaining why. And of course the party concerned may well face questions from the Panel about whether, at the time it made the statement, it did in fact intend to implement the proposed course of action and/or that the intention to do so was based on reasonable grounds.
A party giving a post-offer undertaking must comply with it for the period of time specified in the undertaking and must complete any course of action committed to by the deadline specified in the undertaking. A party that wishes to be excused compliance with a post-offer undertaking must persuade the Panel that a qualification or condition set out in the undertaking applies and, if the Panel does agree, the party must make an announcement explaining how and why the relevant qualification or condition applies.
In order to strengthen the Panel’s ability to monitor compliance with and, therefore, enforce post-offer undertakings, a party that makes a post-offer undertaking must provide the Panel with periodic written reports, approved by the party’s board of directors, “in such form as the Panel may require”, detailing progress made to date in complying with the undertaking and the expected timetable for completion. The Panel may require any such report to be published “in whole or in part”. In addition, the Panel can require an independent supervisor to be appointed, on terms agreed by the Panel, to monitor compliance with the post-offer undertaking, and to submit written reports to the Panel, each at the cost of the party concerned.
(For further information about the rules on post-offer undertakings and intention statements see our LawNow article published on 21 January 2015, "Takeover promises: a firm commitment or only a statement of intent? New rules come into force.”)
Enforcement of commitments
The Takeover Panel has various powers at its disposal to compel a party to comply with its obligations under the Code, including the obligation to comply with a post-offer undertaking for the period of time specified in the undertaking and to complete any course of action committed to by the deadline specified in the undertaking. These powers include:
- Power to make compliance rulings under Section 10(b) of the Introduction to the Code: if the Panel is satisfied that there is a reasonable likelihood that a person will contravene its rules, or is satisfied that a person has contravened its rules, the Panel can give any direction that appears to it to be necessary in order:
o to restrain a person from acting, or continuing to act, in breach of the rules; or o to restrain a person from doing, or continuing to do, a particular thing, pending determination of whether that or any other conduct of his is or would be a breach of the rules; or o otherwise to secure compliance with the rules.
- Power to seek court enforcement under section 955 of the Companies Act 2006: if, on the application of the Panel, the High Court is satisfied that either there is a reasonable likelihood that a person will contravene the Panel’s rules or that a person has contravened those rules, the court may make any order it thinks fit to secure compliance. Failure to comply with a resulting court order may be a contempt of court, the penalties for which include a custodial sentence or a fine.
The Panel has never sought enforcement by the court, so the court’s approach to such an application is untested. Whilst it may be relatively easy for the Panel to obtain an order or injunction from the court to prevent a party doing something that it is required not to do, it is likely to be more difficult for the Panel to obtain an order or injunction to force a party to undo something it has already done, particularly where that would affect an unconnected third party, or to take a course of action that needs to be “policed” by the court.
- Disciplinary powers and sanctions under Section 11 of the Introduction to the Code: if the Hearings Committee of the Panel finds a breach of the Code or of a ruling of the Panel, it can, among other things:
o issue a private or public statement of censure; o report the person’s conduct to a UK or overseas regulatory authority or professional body – e.g. the Financial Conduct Authority, which could investigate whether the person’s conduct constitutes market abuse; or o publish a statement indicating that the person is someone who, in the Panel’s opinion, is not likely to comply with the Code. FCA-authorised firms must not act for the person in question in connection with a transaction to which the Code applies (so called “cold-shouldering”).
SoftBank’s post-offer undertakings
In the announcement of SoftBank’s firm intention to make an offer for ARM, which is expected to be effected by means of a scheme of arrangement, SoftBank says that it will:
- “preserve the ARM organisation, including ARM's existing senior management team, brand, partnership-based business model and culture to ensure continuity of a strong track record;
- maintain the headquarters of ARM in Cambridge;
- at least double the employee headcount in the UK over the next five years thereby enabling ARM to continue to develop leading-edge technology in the UK; and
- increase the headcount of ARM outside the UK over the next five years. …
Following the Acquisition, SoftBank intends that ARM will continue to operate as a separate business group within SoftBank. SoftBank intends to continue to operate the business of ARM's existing headquarters, which comprises the majority of the leadership of the Product Groups of ARM and the leadership of the key corporate functions of Legal, IT, Finance and Human Resources, in Cambridge as the head office of the ARM business group within SoftBank for at least the next five years from the Effective Date. SoftBank does not intend to make any major restructurings or any changes in location of ARM's other operations and places of business.
SoftBank expects the existing personnel of ARM will continue to contribute to the success of ARM following completion of the Acquisition. SoftBank intends that by the end of the period of five years from the Effective Date:
(a) in order to enable ARM to continue to develop leading-edge technology in the UK, it will at least double the employee headcount of ARM in the UK; and
(b) it will increase the employee headcount of ARM outside the UK.
For these increases in headcount, the relative proportion of technical to non-technical employees will be broadly in line with historical trends experienced by ARM. SoftBank will (subject to the consent of the Panel) as soon as practicable, and in any event by no later than the date of the Scheme Document, make post-offer undertakings in respect of these matters in accordance with Rule 19.7 of the Code in all material respects in the terms set out above in (a) and (b) of this paragraph, without qualifications or conditions ("Post-Offer Undertakings"). SoftBank will need to comply with the terms of the Post-Offer Undertakings that are made, for the periods of time specified in the undertakings and complete any causes of action committed to by the dates specified in the undertakings.”
This is believed to be the first time that a party to an offer has given post-offer undertakings. It will be interesting to see whether the Panel will require SoftBank to publish all or part of the reports about its progress in complying with the undertakings, and whether the Panel will insist on an independent supervisor being appointed to monitor compliance.
In Response Statement 2014/2, which introduced the changes to the Code, the Panel said that if it intends to require a supervisor to be appointed, it would expect to inform the party concerned when that party consults the Panel about making the POU. The identity of the supervisor and the terms of their appointment would normally be agreed at that time. The Panel will not usually require a supervisor to be appointed when it is satisfied that it will be able to monitor compliance with a POU itself, or with the assistance of an independent third party. As it should be possible for SoftBank to provide the Panel with objectively-verifiable reports on its progress in complying with its POUs, it seems unlikely that the Panel will insist on a supervisor being appointed.
SoftBank’s firm offer announcement says that between now and the date of the scheme document it will make POUs on terms that reflect the commitments in its announcement. It will therefore be consulting the Panel about the precise terms of the POUs. As the POUs will not be subject to any conditions or qualifications, this should simplify discussions with the Panel. Although SoftBank may well already have had preliminary discussions with the Panel, the precise terms of the POUs (and whether the Panel will in fact require an independent supervisor to be appointed) are likely to become publicly known only when the scheme document is published or a further announcement is made.