The decision by the UK’s Takeover Panel (the Panel) to issue a statement of public criticism1 — the first such statement for three years — of Kraft Foods Inc. (Kraft) for failure to meet certain standards required by the Takeover Code (the Code) offers a timely reminder for advisers in UK bids of their obligations not only to their clients but also to the Panel itself.

Rule 19.1 of the Code

On 28 May 2010, the Panel Executive issued a statement of public criticism of Kraft for failing to meet “the standards required under Rule 19.1 of the Code in connection with certain statements” made by Kraft about one of Cadbury’s manufacturing facilities. Rule 19.1 provides that:

“Each document or advertisement published, or statement made, during the course of an offer must be prepared with the highest standards of care and accuracy and the information given must be adequately and fairly presented.”

Note 1 to Rule 19.1 goes on to say that the Panel “regards financial advisers as being responsible to the Panel for guiding their clients ….with regard to any information published during the course of an offer.”

In its criticism of Kraft, the Panel stated that “it attaches great importance to Rule 19.1. Compliance with the Rule is fundamental to the orderly conduct of takeovers”.

Kraft’s Statements

What had Kraft done that so upset the Panel? When Kraft announced its possible offer for Cadbury in September 2009, it stated:

“we believe we would be in a position to continue to operate the Somerdale facility which is currently planned to be closed…thereby preserving UK manufacturing jobs”.

Similar statements were made in its firm offer announcement in November 2009, its offer document in December 2009 and in its revised offer document in January 2010. Kraft’s offer for Cadbury was declared unconditional on 2 February 2010. Just over a week later, Kraft announced that it had reluctantly accepted that the Somerdale facility would, after all, be closed.

The Panel’s verdict

Kraft stated that it “believe[d]” it could continue to operate the factory — it was a statement of belief because Kraft did not know the detail of the planned closure. According to the Panel, Kraft’s own plans for Cadbury had not been developed “beyond a superficial level”. Of the actual statement by Kraft, the Panel said the following:

“where a party… makes a statement of belief of the kind made by Kraft, Rule 19.1 requires not only that the party honestly and genuinely holds that belief (a subjective test) but also that it has a reasonable basis for so holding that belief (an objective test)… [I]n view of the statements’ prominence and the significance attached to them by.. employees… particular care was required in relation to statements regarding Somerdale…..The Executive accepts that Kraft held an honest and genuine belief that it could keep Somerdale operational….[H]owever,… Kraft should not have made the statements in the form in which it did”.

The Panel went onto say that as Kraft had insufficient detail it was “not a belief which Kraft had a reasonable basis for holding.” In short, Kraft had failed the objective test.

Lazard & Co, Limited (Lazard)

What of Lazard, lead financial adviser to Kraft and primarily responsible for advising Kraft in relation to the Code? The Panel stated that Lazard’s conduct “was not sufficient to merit public criticism” but stated that Lazard should have made further enquiry as to the basis for Kraft’s belief that Somerdale could remain open: “Lazard made no such further enquiry and, as such, failed to discharge fully its responsibilities under Note 1 on Rule 19.1”.


Whilst Lazard was not publicly criticised in the formal sense, clearly the publicity surrounding Kraft’s conduct and Lazard’s advice is extremely unwelcome for an adviser.

The Code makes a number of references to advisers and their responsibilities under the Code. For example, in addition to note 1 to rule 19.1 discussed above and Rule 2.5 , paragraph 3(f) of the Introduction to the Code states that the “Code applies to all advisers…financial advisers have a particular responsibility to comply with the Code and to ensure, so far as they are reasonably able, that their client and its directors are aware of their responsibilities under the Code and will comply with them”.

Note 1 to Rule 2.1 makes it clear that it is the role of advisers to warn clients of the importance of secrecy and security and the restrictions on dealings in target shares. Note that “advisers” is not limited to financial advisers — the obligations under the Code extend to all advisers including lawyers. It is particularly important to bear that in mind when clients are first considering a bid for a UK public target where there may be no financial adviser in place.