Introduction

On September 15, 2014, the UK Takeover Panel (the Panel) published Consultation Paper PCP 2014/2 (the Consultation) which sets out certain proposed amendments to the UK Takeover Code (the Code).

The proposals introduce a new framework for the regulation of 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 is being proposed following a review of the operation and effect of the relevant provisions of the Code in light of the public debate that followed 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 if these are implemented in the form proposed.

The deadline for responding to the Consultation is October 24, 2014.

Distinguishing between “post-offer undertakings” and “post-offer intention statements”

Overview of the current position

Currently the Code does not distinguish between a voluntary commitment made by one party to an offer (i.e. a statement as to what action the party commits to take, or not take) and a statement of intention made by a party, since effectively the Code deems statements of intention to be binding commitments. As a result, whether the statement made is a voluntary commitment or a statement of intention, the party making it will be regarded for Code purposes as being committed to taking, or not taking, that course of action for 12 months (or such other period as is specified in the statement) unless there is a material change of circumstances. No guidance has formally been given as to what a ”material change of circumstances” would be but market participants would expect that to include unforeseen commercial or economic developments which impacted materially on the target business.

Overview of the key proposed changes

The Panel proposes that the Code should 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 that separate Code Rules should apply to each type of statement.

It also proposes making it clear in the Code that if a party to an offer gives a commitment or an undertaking to an identified party or parties (for example, a government agency such as the Competition and Markets Authority), then this will not be subject to the Code requirements that would apply to post-offer undertakings as the party to whom that commitment or undertaking is given can enforce it and it should not be the Panel’s responsibility to do so.

Making a post-offer undertaking and the resulting consequences

Overview of the current position

As broadly stated above, the Code currently requires the bidder, in its offer document, to make statements of intention with regard to certain matters, including the future business of the target company and the continuing employment of its employees. If the bidder does not intend to make any changes in relation to those matters, then the bidder must make a statement to that effect in the offer document.  The Code will then regard the bidder as being committed to taking, or not taking, that course of action for 12 months (or such other period as is specified in the statement) unless there is a material change of circumstances and this will be the case regardless of whether the statement is expressed as a “statement of intention” or a “commitment”.

Overview of the key proposed changes

While the new framework would continue to require a bidder to comply with the terms of any post-offer undertaking it makes for the period of time specified in the undertaking and to complete any course of action it committed to take by the specified date (unless a qualification or condition in the undertaking applied), the Panel proposes the following specific requirements where a bidder wants to make a post-offer undertaking:

  • The bidder will need to consult with the Panel in advance of making a post-offer undertaking so that the Panel can consider the application of the Code to that undertaking.
  • The bidder will need to 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 made by bidders in relation to action they will, or will not, take following the offer.
  • The bidder 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 bidder will need to state prominently any qualifications or conditions to which the post-offer undertaking is subject.
  • 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 bidder or its directors.
  • If the bidder wants to be excused compliance with a post-offer undertaking if certain acts, events or circumstances occur, then those acts, events or circumstances must be set out in specific and precise terms and 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. In addition, while the Panel does not intend to limit the number or scope of qualifications or conditions to post-offer undertakings, or require that they be “material”, it points out 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.
  • So that shareholders and other stakeholders are aware of any post-offer undertakings, if a bidder makes a post-offer undertaking in an announcement or other public statement and not in the offer document, then that undertaking must be included in the next document published by the bidder.

Our views

There was considerable market commentary at the time of the Pfizer bid for AstraZeneca which, as acknowledged in the PCP, was unusual in the sense that firm and specific commitments were made by Pfizer of its plans. In that context, the transaction shone a light on the provisions of the Code around the implications of such statements and the extent to which they would be considered legally binding. We are not particularly surprised that the Panel has taken the opportunity to revisit the provisions around such statements and is looking to set a clearer framework.

While a bidder does not currently make forward looking statements lightly given the provisions of the Code as presently drafted, the impact of the changes to the Code Rules means that a bidder will need to take real care with such firm commitments and, in conjunction with its advisers, assess the implications of such statements, which are covered below.

Firm commitments are not common in takeover offers but, often, the significance of an issue can give rise to the need to be quite specific – perhaps to win over a sceptical target board and wider stakeholders. It will also be interesting to see whether target boards consider themselves more empowered by these provisions to seek greater commitments from bidders. Where firm commitments are given we would expect bidders to avail themselves of the caveats and qualifications the Panel has confirmed will be permissible. We expect, however, bidders to continue to lean towards intention statements unless there is a pressing need to commit firmly to a course of action (and then only one which they can control), which, on the face of it, would seem to have limited upside.

Monitoring and enforcement of post-offer undertakings

Overview of the current position

While the Code sets out a number of enforcement tools available to the Panel, it does not currently include any mechanisms which the Panel can use to monitor the on-going compliance by a bidder with any voluntary commitment which it has made, which commitment might be stated to apply for a significant period of time following the conclusion of the offer.

Overview of the key proposed changes

The Panel wants to increase the effectiveness of the enforcement tools available to it when bidders make post-offer undertakings. As a result, it proposes that the new framework should incorporate the following:

  • If a bidder makes a post-offer undertaking, the bidder should be required to 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 will be to indicate whether the bidder has completed the course of action it committed to take within the specified period of time and, if not, the progress made to date and expected completion timetable. If a bidder committed not to take a particular course of action, the written report will enable the Panel to monitor whether or not that action has not been taken. Such written reports will need to be approved by the bidder’s board and signed on its behalf by a duly authorised director.
  • The Panel will be able to require a bidder to appoint a supervisor to both monitor compliance by the bidder with any post-offer undertaking it has made and submit written reports to the Panel as to the compliance by the bidder with that undertaking. The Panel will need to agree the identity of and terms of appointment of the supervisor, who will need to be independent of the bidder and any concert party, and the bidder will have to meet the costs of the supervisor.
  • If a bidder wants to rely on a qualification or condition in order to take, or not take, a course of action otherwise than in compliance with the terms of any post-offer undertaking, then the bidder will need to consult the Panel in advance and obtain the Panel’s consent to rely on that qualification or condition. If the Panel then consents to the course of action being taken or not taken (as appropriate), the bidder will need to make an announcement promptly 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.

Our views

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 Rules were amended in 2011. In particular, financial advisers have been concerned for some time with the extent to which it is their responsibility to procure that bidders comply with forward looking statements once the offer closes and the relevant bidder might even cease to be their client. We are not surprised that the Panel has looked at tightening up the provisions in this area, nor 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, seeking to put safeguards in place such that they are put on notice before a breach may occur is logical.

During the consultation process, we imagine there will be some clarity sought on how these processes might work in practice. We anticipate that financial advisers will again be concerned as to the scope of their responsibilities in the period following the offer - and will be concerned to address the situation where bidder clients seek to approach the Panel to deviate from a proposed committed course of action after the offer (and perhaps the mandate) ends, possibly seeking to ensure under the terms of their engagement that they are consulted before any approach to the Panel is made.

Putting the onus on compliance with bidders by submitting written reports underlines that work prior to the making of any statements will need to be relatively extensive and relevant statements thoroughly tested to ensure there will not be an insurmountable issue in the aftermath of a bid.

Post-offer intention statements

Overview of the current position

As already mentioned, the Code does not currently distinguish between a voluntary commitment made by a bidder and a statement of intention in which the bidder states what action it is intending to take, or not take. Whether a “statement of intention” or a “commitment” is made, the bidder will be regarded, under the Code, as being committed to taking, or not taking, that course of action for 12 months, or such other period as is specified in the statement, unless there is a material change of circumstances.

Overview of the key proposed changes

While the Panel does not propose that the monitoring and enforcement regime which would apply to post-offer undertakings would also apply to post-offer intention statements, it does consider that such intention statements should be made with due care and that, if a bidder makes a post-offer intention statement relating to a particular course of action that it intends to take, or not take, after the end of the offer period, this will give rise to an expectation that the bidder will take, or not take, that particular course of action. As a result, a post-offer intention statement will need to be an accurate statement of the bidder’s intention at the time that it is made (a “subjective” test) and made on reasonable grounds (an “objective” test).

If a bidder makes a post-offer intention statement and then subsequently wants to take a different course of action, or not take a course of action it had stated it intended to take, the Panel would need to be consulted to understand the bidder’s reasons for so acting, or not acting, and the Panel would need to be satisfied that, when it was made, the post-offer intention statement was both an accurate statement of the bidder’s intention and was made on reasonable grounds. In considering this, the Panel would take into account factors such as whether the bidder 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 between the date on which the post-offer intention statement was made and the date on which the bidder wished to take, or not take the action in question. If the Panel felt a breach of the Code had occurred, the Panel would then decide whether to commence disciplinary proceedings or impose one or more of the sanctions set out in the Code.

There is a slight nuanced shift in the Rules from the current position where intention statements are automatically binding for a period of 12 months. Under the revised proposals, the Code is not specific on a period by which the intention statement is ‘timed out’ but if a bidder makes a post-offer intention statement and, in the 12 months from the end of the offer period (or such other period of time as was specified in the statement), the bidder decides it wants to take a course of action different from its stated intentions, or not to take a course of action which it had stated it intended to take, then it would also be required to consult the Panel. The Panel would then decide whether the Code had been breached and whether the bidder should be required promptly to make an announcement describing the course of action it has taken, or not taken, and explaining its reasons for taking, or not taking, that course of action.

Our views

Introducing a two tier system of statements of ‘commitment’ and ‘intention’ has inevitably led to the Rules around intention statements being amended. We do not consider this will dramatically alter the implications of making an intention statement and the processes bidders will be required to go through and address with their advisers – namely, that the statement of intention is honestly held and there is a reasonable basis for that belief. The Panel’s view, for example, is understood to be that it would not have reached a different conclusion in relation to its criticism of Kraft, namely that Kraft did not have a reasonable basis for making the statements it made during its bid for Cadbury in relation to Cadbury’s Somerdale factory. Exposure under the Code for financial advisers will remain as it is currently, namely, did they take all necessary steps to ensure that the client understood the implications of making an intention statement and was such statement sufficiently probed and verified to the standard the Panel would apply under the Rules? As stated above in connection with commitments, advisers will be concerned to ensure they are notified prior to their bidder 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 undertakings to take a certain specified course of action. It is not anticipated that the amendments to the intention statements regime will lead to a material change in practice from what has evolved since 2011.

Conclusion

As stated above, in the aftermath of Pfizer/AstraZeneca it is not surprising that the Panel has sought to tighten the Rules. The Rules are arguably a significant shift in takeover regulation and it is interesting that the Panel has chosen to focus on the rules in an area where there are likely to be issues in only a handful of bids.

There will be market participants who take the view that following completion of an offer the Panel should no longer be concerned with matters pertaining to an offer which has closed – that approach, however, would seem to ignore the direction of travel since 2011 where the focus of the Rules shifted to stakeholders as well as shareholders and that statements of future plans for the target business can often be key in the battle for control of a target. In that context, we consider it is appropriate that these statements are properly regulated.

The Rules will clearly have a significant impact on those bids where specific commitments are made but the extent to which bidders are inclined to go down that road will remain debateable. What the PCP underlines is that 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 to the Rules in a material way, save for the pre-emptive need for consultation with the Panel following the offer if the path set out in the offer document is not going to be followed.