On 17 January 2014, the UK Panel on Takeovers and Mergers (the "Panel") published Practice Statement number 27 confirming what directors of target companies can and cannot undertake to do in their capacities as shareholders in respect of takeover bids.
Under rule 21.2 of the UK Takeover Code (the "Code") , "inducement" (or break) fees and other "offer related arrangements" between the offeror and the offeree company and their directors are clearly prohibited except with the consent of the Panel. Practice Statement number 27 has been issued to remind practitioners of this prohibition and its consequences.
The prohibition is deliberately wide and an "offer-related arrangement" is defined as any agreement, arrangement or commitment in connection with an offer subject to certain exclusions. One of these exclusions is an irrevocable commitment or a letter of intent to accept an offer.
Therefore, whilst offeree company directors may enter into such irrevocable commitments or letters of intent, if they undertake to do anything more than that, this risks being viewed by the Panel as a prohibited offer-related arrangement. This risk will be particularly acute where such matters are considered by the Panel to be undertaken by a person more in his capacity as a director than a shareholder. For that reason, qualifying a commitment by stating that it is subject to the relevant director's fiduciary or statutory duties will almost certainly be ineffective and may even be counterproductive as such a commitment should not be given in a person's capacity as a director in the first place.
In its review of the Code in 2012, the Panel noted with disapproval examples of behaviour it had discovered where prohibited offer-related arrangements had been entered into by offeree directors in the guise of co-operation agreements and the like. These included commitments not to solicit a competing offer from other offerors, to recommend an offer to offeree shareholders and to notify the offeror of possible competing offers. The Panel stated that it would monitor the operation of rule 21.2 and take appropriate disciplinary action in the event of further breaches.
Seen against this background, Practice Statement number 27 comes as no surprise, its purpose being to clarify what is and what is not a breach of rule 21.2.
The statement confirms that unacceptable provisions include commitments:
- not to solicit a competing offer;
- to recommend an offer to offeree shareholders;
- to notify the offeror 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 offeree company for due diligence or other purposes;
- to assist the offeror with the satisfaction of its offer conditions;
- to assist the offeror with the preparation of its offer documentation; and
- to conduct the offeree company's business in a particular manner during the offer period.
By contrast, permitted provisions may 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.
This latest statement by the Panel underlines the importance of liaising with the Panel at the earliest opportunity whenever there is doubt as to whether a proposed irrevocable commitment or letter of intent complies with rule 21.2. In 2012, the Panel effectively promised clarification of the rule and disciplinary action for those who continue to "push the envelope".
A spokesperson for the Panel recently indicated to us that the Panel had been disappointed to come across further instances of breaches of the restriction in Rule 21.2 by certain market participants, particularly given what the Code Committee said in its 12 month review of the 2011 amendments.
Now that it has issued this clarification of the rules, we can reasonably suppose that the Panel has positioned itself to take the disciplinary action. We expect this will likely be in the form of public censure.
Public censure by the Panel is to be avoided if at all possible as it can be reputationally disastrous for participants in the UK market and, for the most serious breaches, may take the form of "cold shouldering" whereby persons authorised by the UK Financial Conduct Authority are not permitted to act for any of the parties involved in the infringement.