On 17 January 2014, the UK Takeover Panel published Practice Statement No. 27 relating to how the prohibition on “offer-related arrangements” applies to irrevocable commitments and letters of intent given by target company shareholders who are also directors of the target company1.
Until relatively recently, it was common practice in the UK for potential bidders to require target companies, in the context of recommended offers, to agree to various deal protection measures. These included break fees, exclusivity undertakings, matching rights and implementation agreements. In light of concern that such measures may deter potential competing bidders, and, specifically, the public controversy relating to Kraft Foods Inc.’s bid for Cadbury plc, in September 2011 the Panel amended the UK Takeover Code to introduce a general prohibition on “offer-related arrangements” of this sort, subject to certain exceptions2.
Under Rule 21.2(a) of the Code, except with the consent of the Panel, neither the target company nor any person acting in concert with it may enter into any “offer-related arrangement” with either the bidder or with any person acting in concert with it during an offer period or when an offer is reasonably in contemplation. Directors of the target company are presumed to be acting in concert with the target company for this purpose.
Subject to certain exclusions, an “offer-related arrangement” means any agreement, arrangement or commitment in connection with an offer. Rule 21.2(b)(iv) of the Code excludes irrevocable commitments and letters of intent from the definition of “offer-related arrangement”.
Application of rules to irrevocable commitments and letters of intent
The Panel has now confirmed that while the Code allows a shareholder in a target company who is also a director of the target company 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 company which he holds or controls, it does not allow such a shareholder to enter into other kinds of “offer-related arrangements” with the bidder or with any person acting in concert with the bidder. Provisions which have been included in such irrevocable commitments and which the Panel regards as being in breach of these rules have included commitments:
- not to solicit a competing offer;
- to recommend an offer to target company shareholders;
- to notify the bidder if the director becomes aware of a potential 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 company for due diligence or other purposes;
- 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 company’s business in a particular manner during the offer period.
In the Panel’s view, such commitments are entered into by the relevant individual in his capacity as a director of the target company and, consequently, are in breach of Rule 21.2. For this purpose, the fact that the relevant commitments are stated to be subject to the relevant director’s fiduciary or statutory duties is not relevant.
Rule 21.2(b)(iv) does, however, allow the inclusion in an irrevocable commitment or letter of intent of provisions which are designed solely to give effect to a commitment to accept the offer (or to vote in favour of the scheme of arrangement). These include:
- an undertaking not to dispose of the shares or withdraw an acceptance of the offer;
- an undertaking 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 commitment relates.
Practice Statement No. 27 comes as no surprise. In the Statement issued by the Panel following its review of the changes made to the Code in September 20113 it noted that some advisers and other market participants continued to “push the envelope” in relation to the prohibition on “offer-related arrangements.” One specific issue identified by the Panel was the inclusion in irrevocable undertakings by target company directors of restrictions on soliciting competing offers, commitments to recommend the bidder’s offer to shareholders, and undertakings to notify the bidder if the director becomes aware of a potential competing offer. In its view, such provisions are not permitted by Rule 21 as they “...relate to matters undertaken not solely in their capacity as [target] company shareholders but also in their capacity as [target] company directors (and therefore as persons acting in concert with the [target] company)”4.
That said, it represents a useful reminder of where the Panel draws the line in this regard and of the need to liaise with the Panel wherever there is doubt as to whether a proposed irrevocable commitment or letter of intent complies with the rules. There seems to be little doubt that, given this latest statement by the Panel and its comments in the review of the Code which preceded it, any future breach of these rules will be dealt with severely.