On December 23, 2014, the UK Takeover Panel (the Panel) published Response Statement 2014/2 (the Response Statement) setting out the final form of various changes to the UK Takeover Code (the Code) in relation to post-offer undertakings and intention statements. This follows on from Consultation Paper PCP 2014/2 (the Consultation) which was published by the Panel in September 2014. The changes have (broadly speaking) been adopted in line with the proposals set out in the Consultation, although the Response Statement includes additional guidance and clarification on a number of points.
The revised rules (which came into effect on January 12, 2015) introduce a new framework for the regulation of forward-looking statements made by both bidder and target companies during an offer, the aim being to clearly distinguish between statements relating to any particular course of action they commit to take, or not take, after the end of the offer period and any statement relating to any particular course of action they intend to take, or not take, after the end of the offer period. This new framework follows on from a review of the operation and effect of the relevant provisions of the Code in light of the public debate in relation to a voluntary statement made by Pfizer Inc in May 2014 regarding certain far-reaching and long-term commitments it would make if its bid for AstraZeneca plc was successful.
This briefing sets out our views on the key changes and some of the practical implications for companies and their advisers.
Distinguishing between ‘post-offer undertakings’ and ‘post-offer intention statements’
Overview of the previous position
Prior to the introduction of the revised rules, the Code did not distinguish between voluntary commitments (i.e. statements as to what action the party committed to take, or not take) and statements of intention, since the Code effectively deemed statements of intention to be binding commitments. As a result, whether a statement made was a voluntary commitment or a statement of intention, the party making it was regarded for Code purposes as being committed to taking, or not taking, that course of action for 12 months (or such other period as was specified in the statement) absent a ‘material change of circumstances’.
Overview of the key changes
The revised rules distinguish between a ‘post-offer undertaking’ (whereby a party commits to take, or not take, certain action after the end of the offer period) and a ‘post-offer intention statement’ (whereby a party specifies action it intends to take, or not take, after the end of the offer period), and separate Code rules apply to each type of statement.
The revised rules also make it clear that, if a party to an offer gives a commitment directly to (and that is enforceable by) an identified party or parties, this will not be subject to the Code requirements that apply to post-offer undertakings. This is on the basis that the party to whom that commitment or undertaking is given can enforce it and it should not therefore be the Panel’s responsibility to do so. The parties to whom such a commitment is given can be identified by name or as a member of an identified class of persons and, as is made clear in the Response Statement, it includes contractual commitments as well as undertakings given to governmental or regulatory agencies.
Making a post-offer undertaking and the resulting consequences
Overview of the previous position
As summarised above, the previous rules did not draw a distinction between commitments and statements of intention. Therefore the Panel effectively regarded any statements of intention (including negative statements) by a party to the offer as committing them to taking, or not taking, the relevant course of action for 12 months (or such other period as was specified in the statement) absent a ‘material change of circumstances’.
Overview of the key changes
Under the revised rules, an enhanced package of requirements applies to post-offer undertakings (compared to statements of intention – for which see further below).
A party who makes such an undertaking will be required to comply with its terms for the period of time specified in the undertaking (there is no default 12 month period as was the case under the previous rules) and to complete any course of action it commits to take by the specified date unless a qualification or condition to the undertaking applies. In addition, the revised rules impose the following specific requirements:
- The relevant party must consult with the Panel in advance of making any such undertaking.
- The relevant party must expressly state that it is making a post-offer undertaking so that there is clarity for shareholders and other stakeholders as to the status of statements in relation to action it will, or will not, take following the offer.
- The relevant party must specify the period of time for which the post-offer undertaking is being made or the date by which the course of action committed to will be completed.
- The relevant party must state prominently any qualifications or conditions to which the post-offer undertaking is subject and the Panel must be consulted (and their consent obtained) prior to departing from compliance with the undertaking in reliance on any qualification or condition. If the Panel consents, the relevant party must then make an announcement via a Regulatory Information Service describing the course of action it has taken (or not taken) and explaining how or why the relevant qualification or condition applies.
The terms of any post-offer undertaking (and the qualifications or conditions to which it is subject) must be specific and precise, readily understandable and capable of objective assessment and not depend on subjective judgements of the relevant party or its directors.
In the Consultation, the Panel noted that if the relevant party wanted to be excused compliance with a post-offer undertaking if certain acts, events or circumstances occurred, then those acts, events or circumstances must not be general or vague. For example, qualifications and conditions with regards to a ‘material change of circumstances’, directors’ ‘fiduciary duties’ or unspecified ‘force majeure events’ would not be permitted.
A number of respondents were concerned that prohibiting parties from including qualifications or conditions referring to unspecified force majeure events or to events, acts or circumstances beyond the relevant party’s control would encourage parties to include a long list of specific qualifications and conditions which would be undesirable and, in any event, could never be exhaustive. In the Response Statement, the Panel clarified that this was not its intention and that, if appropriately drafted, a qualification or condition could encompass such events without referring to each and every possible event individually.
For example, the Panel would normally permit the inclusion of a qualification or condition providing that the post-offer undertaking will no longer apply where the Panel determines that the party is unable to comply with it as a result of an event, act or circumstance beyond its control. If the relevant party then sought to rely on a qualification or condition of this nature, the Panel notes that:
- It would not normally regard the qualification or condition as being satisfied where the undertaking remained capable of being performed even though an event, act or circumstance may have made compliance more difficult.
- The relevant party would also need to satisfy the Panel that the event, act or circumstance was outside its control – the types of events that the Panel considers would be covered would include, for example, fires, floods, earthquakes and other ‘acts of God’ (although if the party could have taken steps to avoid the event, act or circumstance, or minimise its impact, but had failed to do so, the Panel would not normally regard the relevant party as free from responsibility for its failure to comply with the undertaking).
In addition the Response Statement notes that it may be possible for a qualification or condition to be included that refers to the financial effect of generally-described events on the relevant party or its assets. In considering whether to permit this, the Panel will require the financial effect of the relevant event to be set out in a manner which is specific, precise, readily understandable, capable of objective assessment and not dependent on the subjective judgement of the relevant party or its directors. The Panel notes that, in order to meet these requirements, the party may need to specify (with a high degree of detail) how the relevant financial measure will be calculated.
Although there is not a limit on the number of qualifications or conditions to post-offer undertakings that can be included, and the Panel does not intend to refuse to permit post-offer undertakings to be made subject to particular qualifications or conditions (provided these comply with the requirements of the Code), it notes that the strength of any undertaking, and so the extent to which it achieves its objectives, may be diminished as the scope and number of qualifications and conditions increases or if immaterial qualifications and conditions are included. If an undertaking is proposed to be made for an extended period, the Panel also notes that it would want to seek appropriate assurances from the relevant party and its advisers as to its lawfulness.
The Panel has the discretion to refuse to allow a party to include in a post-offer undertaking a commitment which it determines would more appropriately be given in a different form. Examples of when the Panel envisages that it may reach such a determination include a commitment to a specific person (for example, an individual director or employee) which could instead be framed as a direct contractual commitment with the relevant person.
Where a party has made a post-offer undertaking that is subject to qualifications or conditions, the revised rules provide that it must not take any action (or omit to take any action) which would cause an event, act or circumstance referred to in a condition or qualification to occur. If the Panel determines that a party has taken (or failed to take) such action, it will not normally permit the party to rely on the relevant qualification or condition to avoid compliance with its undertaking.
The Response Statement notes that a post-offer undertaking can be made subject to a pre-condition although (as with any other conditions) the pre-condition would need to be specific, precise, readily understandable, capable of objective assessment and not dependent on subjective judgements of the relevant party or its directors. As with other post-offer undertakings (see further below), the Panel would also be able to appoint a supervisor to monitor whether the event, act or circumstance which was the subject of the pre-condition had or had not occurred. The Panel has also clarified in the Response Statement that a post-offer undertaking made by a target company during the course of an offer would not bind the bidder that acquired that company unless the bidder had endorsed the undertaking. However, a post-offer undertaking made by a bidder would continue to be binding on it even if the bidder were subsequently acquired by a third party.
So that shareholders and other stakeholders are aware of any post-offer undertakings, if a party makes a post-offer undertaking in an announcement or other public statement and not in a document published by it in connection with the offer, then that undertaking must be included in the next document published by it. The Panel may also require a document to be sent to the target’s shareholders and persons with information rights and made available to the target’s and bidder’s employee representatives and pension trustees. In addition, any subsequent reference by a party to a post-offer undertaking it has made must be accompanied by a reference to any qualifications or conditions to which it is subject or to the relevant sections of the document, announcement or other information in which they were included.
As stated in our previous briefing, we are not particularly surprised that the Panel has taken the opportunity to revisit the provisions around forward looking statements and has established a clearer framework.
While forward looking statements were not made lightly previously (given the historic provisions of the Code), the impact of the changes to the rules means that parties to an offer need to take real care with any firm commitments and, in conjunction with their advisers, assess the implications of such statements, which are covered below. We expect advisers will also be concerned to ensure they are notified prior to their client approaching the Panel to discuss invoking any conditions or qualifications in relation to a post-offer undertaking.
Where firm commitments are given we would expect bidders (or, where relevant, target companies) to avail themselves of the caveats and qualifications the Panel has confirmed will be permissible. As mentioned above, one of the concerns in the market following the Consultation had been that there ought to be some scope for parties to be released from commitments on the occurrence of force majeure type events. In that context, we consider it to be a positive outcome that the Panel will permit the inclusion of a qualification to the effect that the undertaking will no longer apply where the Panel determines that compliance is no longer possible as a result of external events outside the relevant party’s control and may also permit qualifications referring to the financial effect of generally-described events on the relevant party or its assets. The additional feedback and guidance included in the Response Statement from the Panel in this area is also helpful, although it is clear that the standards the Panel will apply when determining whether a qualification can be invoked will be very high.
We expect bidders to be cautious in terms of their willingness to give post-offer undertakings until Panel practice in this area is clearer and that, where undertakings are given, it will be in relation to matters where the bidder has real control. Another area of concern in respect of qualifications to post-offer undertakings is the nature of the bidder’s obligations to ensure any qualification is not triggered as a result of its own acts or omissions. As a result, we anticipate that bidders will continue to lean towards intention statements and that undertakings will remain unusual unless there is a pressing need to make a firm commitment in relation to a specific issue (for example to win over a sceptical target board and wider stakeholders). However, it will also be interesting to see whether target boards consider themselves empowered by these provisions to seek greater commitments as part of negotiations around their willingness to provide a recommendation.
Monitoring and enforcement of post-offer undertakings
Overview of the previous position
While the Code sets out a number of enforcement tools available to the Panel, it did not previously include any mechanisms which the Panel could use to monitor on-going compliance by a bidder or target company with any commitment it had made.
Overview of the key changes
The revised rules include a specific framework for monitoring compliance with post-offer undertakings, including provisions to the following effect:
- The relevant party must submit written reports to the Panel after the end of the offer period at such intervals and in such form as the Panel may require. The purpose of the reports is to indicate whether it has completed the course of action it committed to take within the specified period of time and, if not, the progress made and expected completion timetable. If a party committed not to take a particular course of action, the written report will enable the Panel to monitor whether that action has been taken. Such written reports must be approved by the board of the relevant party and signed on its behalf by a duly authorised director. The Panel has the ability to require any such report to be published (in whole or in part) via a Regulatory Information Service where it considers this to be appropriate.
- The Panel can require the appointment of a supervisor to monitor compliance by the relevant party with any post-offer undertaking it has made and to submit written reports to the Panel. The identity, and terms of appointment, of the supervisor must be agreed with the Panel – in particular, the supervisor must be independent of the relevant party (and any of its concert parties). The party that made the undertaking will be responsible for meeting the costs of the supervisor.
In the Response Statement, the Panel explains that it would expect to notify a party that it will be required to appoint a supervisor as part of the consultation with the Panel about inclusion of the relevant post-offer undertaking and that it would expect the identity of the supervisor and terms of appointment to be agreed at the same time. It is noted that the Panel will not usually require a supervisor to be appointed if the Panel is satisfied that it will be able to monitor compliance itself or with the assistance of an independent third party. The Panel has also clarified that there is no requirement to disclose an estimate of the fees and expenses expected to be incurred in relation to the appointment of a supervisor under Rule 24.16 (which provides for disclosure of fees and expenses incurred in connection with an offer).
Compliance with any forward looking undertakings following the offer – and the consequences of non-compliance – and the extent to which the Panel ‘polices’ compliance has been a source of some debate in the market since the Code was amended in 2011. We are not surprised that the Panel has looked at tightening up the provisions in this area, nor at their recognition that the tools at their disposal to ensure compliance with forward looking statements are somewhat limited in circumstances where a statement is not complied with and the breach has already occurred before it comes to their attention. In that context, putting safeguards in place such that they are put on notice before a breach may occur is logical.
Financial advisers have been concerned for some time with the extent to which the Panel considers it is their responsibility to procure that bidders or target companies comply with forward looking statements once the offer closes and, in some cases, the relevant party might also cease to be their client. In that context, the guidance given by the Panel on the exact scope of financial advisers’ responsibilities contained in the Response Statement is helpful and it is largely an endorsement of what was considered to be the case in the market, namely that rather than a financial adviser assuming ongoing responsibility for a client’s actions after an offer is completed, the primary focus of the Panel in any investigation relating to non-compliance with a post-offer undertaking or post-offer intention statement will be whether the financial adviser properly discharged its obligations such that its client was fully aware of the Code requirements in relation to, and consequences of, the statement at the time it was made.
The onus on bidders (or where relevant target companies) to demonstrate compliance with post-offer undertakings by submitting written reports to the Panel, and the ability of the Panel to appoint a supervisor to monitor compliance, underlines the fact that relatively extensive work will need to be undertaken prior to the making of any such undertakings and their content will need to be thoroughly tested to ensure that an insurmountable issue does not arise in the aftermath of a bid.
Post-offer intention statements
Overview of the previous position
As already mentioned, the Code did not historically distinguish between voluntary commitments and statements of intention – both resulted in the Panel treating the relevant party as being committed to taking, or not taking, that course of action for 12 months, or such other period as was specified in the statement, absent a ‘material change of circumstances’.
Overview of the key changes
The framework for post-offer undertakings outlined above does not apply to post-offer intention statements. However the Panel does consider that such intention statements should be made with due care. The revised rules therefore require that they are an accurate statement of the relevant party’s intention at the time the statement is made (a ‘subjective’ test) and are made on reasonable grounds (an ‘objective’ test).
If a party makes a post-offer intention statement and, during the 12 months following expiry of the offer period (or such other period of time as is specified in the statement), wants to take a different course of action, or not take a course of action it has stated it intends to take, the Panel must be consulted. In considering whether any breach of the Code may have occurred when the statement was made, the Panel would take into account factors such as whether the relevant party was able to demonstrate that it had a good reason for taking a different course of action or for not taking a course of action it had stated it intended to take, and the period of time which had elapsed since the post-offer intention statement was made. If the Panel determines that a breach of the Code has occurred, it would then decide whether to commence disciplinary proceedings or impose one or more of the sanctions set out in the Code.
Where the party departs from its post-offer intention statement, it would be required to make an announcement describing the course of action it had (or had not) taken and explaining its reasons.
Introducing a two tier system of statements of ‘commitment’ and ‘intention’ has inevitably led to the rules around intention statements being amended. We welcome the approach the Panel is taking in this context as we shared the view that the previous position, under which intention statements were effectively treated as binding commitments, was unsatisfactory. However, we do not consider that the revisions will lead to any significant change in the processes bidders or target companies will be required to go through with their advisers before giving an intention statement – namely, that the statement of intention is honestly held and there is a reasonable basis for that belief – or the seriousness with which they will take compliance with such statements.
Exposure under the Code for financial advisers will remain as it is currently, namely, an assessment by the Panel of whether they took all necessary steps to ensure that the client understood the implications of making the intention statement and whether the statement was tested and verified to the standard the Panel would expect. As stated above in connection with commitments, advisers will be concerned to ensure they are notified prior to their client approaching the Panel to discuss non-compliance with any intention statements.
Providing that intention statements are properly formulated and made in good faith, there is arguably scope within the rules for deviation from such statements in the aftermath of an offer where circumstances change, and certainly more so than would be the case with post-offer undertakings. However, as noted above, it is not anticipated that the amendments to the intention statements regime will lead to a material change in practice from that which had evolved previously.
In the aftermath of Pfizer/AstraZeneca it is not surprising that the Panel has sought to tighten the rules. The changes are arguably a significant shift in takeover regulation and, as noted in our previous briefing, it is interesting that the Panel has chosen to focus on the rules in an area where issues are only likely to arise in a handful of bids.
As emerged from the responses to the consultation, there are those who continue to take the view that the Panel should no longer be concerned with matters pertaining to an offer which has closed, however it is no surprise to us that the Panel has re-iterated in the Response Statement it considers the regulation of such statements to be clearly within its remit. The revised rules will clearly have a significant impact on those bids where specific post-offer commitments are made, but the extent to which bidders will be inclined to go down that road remains debatable – we expect there will only be a limited number of offer situations where the reasons for doing so are sufficiently compelling. That said, confirmation from the Panel that there may be scope to be released from a post-offer commitment in relation to unforeseen or unspecified events is a welcome development.
The potential tension between bidders and targets over the scope of forward looking statements will remain an issue. Properly formulated statements of intention are unlikely to be affected by the changes in a material way, save for the pre-emptive need for consultation with the Panel following the offer if it is intended to depart from such statements.