The Takeover Panel published on 17 January 2014 a new practice statement on irrevocable undertakings and letters of intent given by target shareholders who are also directors of the target in connection with an offer.
The Practice Statement clarifies how the Panel Executive applies Rule 21.2 (which prohibits, except with the consent of the Panel, a target, and any person acting in concert with it, from entering into any offer-related arrangement with a bidder or any person acting in concert with it, during an offer period or when an offer is reasonably in contemplation) to such irrevocable undertakings.
The target company’s directors are presumed to be acting in concert with the target company under paragraph (2) of the definition of “acting in concert”. The restriction in Rule 21.2(a) therefore extends to offer-related arrangements entered into between such directors and a bidder.
Rule 21.2(b) defines an “offer-related arrangement” as being any agreement, arrangement, or commitment in connection with an offer, subject to certain exclusions. Rule 21.2(b)(iv) provides that irrevocable commitments and letters of intent are excluded from the definition.
The Panel considers that Rule 21.2(b) (iv) permits a target company shareholder who is also a director of the target company to enter into an irrevocable undertaking or letter of intent to accept an offer (or to vote in favour of a scheme of arrangement) in relation to the shares held or controlled by the individual i.e. in his or her capacity as a shareholder. Rule 21.2(b) (iv) does not permit a target company shareholder who is also a director to enter into other kinds of offer-related arrangement.
Provisions which the Panel regards as being in breach of Rule 21.2 include commitments:
- not to solicit a competing offer;
- not to recommend an offer to the 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.
The Panel regards such commitments as having been entered into in the relevant individual’s capacity as a director of the target company and, as such, to be in breach of Rule 21.2. This would be the case even if the commitments were stated to be subject to the relevant director’s fiduciary or statutory duties.
The Panel will, however, permit 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). For example:
- 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.