Under changes to the Takeover Code that will take effect on 8 January 2018, a party making a takeover offer will have to provide more information, and at an earlier stage, about how the transaction will affect the target, and it will have to provide more information on how it has complied with forward-looking statements that it made in the context of the offer. In addition, bidders will need to wait 14 days from announcing their firm intention to make an offer before they can publish the offer document (unless the target agrees otherwise).
The changes are being introduced partly in response to pleas from some quarters of industry and politics for the Government and the Takeover Panel to scrutinise more carefully takeover offers for UK companies that are made by (especially) foreign entities, particularly where the transaction could have a significant impact on jobs and the UK economy generally. Other responses include the Government’s proposals, published in October this year, to reform and strengthen its powers for scrutinising the national security implications of particular types of investments.
The key changes are:
- A bidder will have to provide more details on:
- its intentions regarding any research and development function of the target
- any anticipated material change in the balance of the skills and functions of the target’s employees and management
- the likely repercussions of its strategic plans on the location of the target’s headquarters and headquarters functions.
- Details of the bidder’s intentions (covering the additional matters) will have to be included in the bidder’s announcement of a firm intention to make an offer.
- Where a post-offer undertaking is made in the context of a takeover offer, a report on how the undertaking has been complied with must be publicly announced as well as submitted to the Panel.
- Whether or not a post-offer intention statement has been followed through will need to be publicly announced and notified to the Panel.
- A bidder cannot publish its offer document for at least 14 days from the firm offer announcement unless the target’s board consents.
More information about how the transaction will affect the target
At present, a bidder is required by Rule 24.2 to include in its offer document details of, among other things, its intentions with regard to the future business of the target; its intentions with regard to the continued employment of the employees and management of the target, including any material change in the conditions of employment; its strategic plans for the target, and their likely repercussions on employment and the locations of the offeree company’s places of business; and its intentions with regard to employer contributions into the target’s pension scheme(s).
Rule 25.2(a) requires the target’s board to set out its opinion on the offer and to include its views on the effects of the implementation of the offer on all of the target’s interests including, specifically, employment; and on the bidder’s strategic plans for the target, and their likely repercussions on employment and the locations of the offeree company’s place of business.
In recent years, statements by the bidder of its intentions regarding the target’s business, employees and pension schemes have been closely scrutinised by the Panel, and bidders are expected to make their statements as specific as possible. In particular, a statement that the bidder intends to conduct a review of the target’s business after the transaction completes will not of itself be sufficient: the bidder should disclose what the review is likely to cover and what it expects the outcome to be. In December 2016 the Panel introduced new checklists and forms which are required to be completed and submitted by the bidder’s financial adviser in order to demonstrate that the offer document includes all the information required by Rule 24.2. The target’s financial adviser must similarly complete a checklist in order to demonstrate that the offer document includes all the information required by Rule 25.2. Obviously the extent to which the target’s board is able to express a meaningful view on the bidder’s plans will depend on the level of detail provided by the bidder.
In addition, the target’s employee representatives and pension scheme trustees are entitled to give their opinion on the effects of the offer on, respectively, employment and the offeree company’s pension schemes: see further below.
Although the Panel believes that the level of detail provided by bidders has improved in the last few years, it considers that new rules are warranted in order to increase the amount of information given, and hence also the ability of the target’s board to comment on the bidder’s plans. Accordingly, as well as having to include in its offer document details of how the bidder intends to deal with the business, employees and pension schemes of the offeree company (and, where appropriate, of the bidder itself), the bidder will also be required by Rule 24.2(a) to include details of how it intends to deal with:
- any research and development function of the target;
- any material change in the balance of the skills and functions of the target’s employees and management – for example, any plans to reduce the number of workers with particular qualifications or technical skills; and
- the likely repercussions of its strategic plans on the location of the target’s headquarters and headquarters functions.
If the bidder’s intentions change during the offer period – for example, having been granted access by the target company to non-public information about the workforce and existing strategic plans – it will have to announce its new intentions.
Information to be provided at an earlier stage
As noted above, the target’s employee representatives and pension scheme trustees are entitled to give their opinion on the effects of the offer on, respectively, employment and the offeree company’s pension schemes. However, in a recommended bid the offer document and response circular from the target’s board are combined so, if the target’s employee representatives or pension scheme trustees wish to have their opinion on the effects of the offer appended to the combined document, their opinion will need to be prepared on the basis of the information included in the bidder’s announcement of a firm intention to make an offer (Rule 2.7 announcement).
Although a Rule 2.7 announcement must include certain information, the bidder is not required to set out its intentions with regard to the target’s business, employees and pension schemes. If the firm offer announcement does not detail such intentions, it is difficult for the target’s employee representatives or pension scheme trustees to give a meaningful opinion on the effects of the offer on employment or on the target’s pension schemes by the time the combined document is published.
The Panel has therefore decided to amend Rule 2.7 so that a firm offer announcement will have to include details of the bidder’s intentions with regard to the target’s business, employees and pension schemes, including the additional information described above. The information will also have to be included in the offer document. Bringing forward the time when the bidder has to make such statements is designed to:
- make it easier for the target’s employee representatives and pension scheme trustees to have their opinion on the effects of the offer appended to the target’s response circular or combined document;
- enable an earlier and more informed debate to be held by shareholders and other stakeholders as to the merits and demerits of an offer and as to the bidder’s intentions with regard to the business, employees and pension schemes of the target;
- assist the target’s board in preparing its opinion on the offer under Rule 25.2(a), as it will be able to take into account any opinions on the effects of the offer it may have received from the employee representatives and pension scheme trustees; and
- provide additional time for employees in target companies that do not have recognised employee representatives to decide whether to elect or appoint a person to represent them for the purpose of providing an opinion.
However, where a party announces that it may make an offer (a “possible offer” announcement), such information will not have to be included.
Reports on how a party has delivered on statements made during an offer about a future course of action
Under rules introduced in January 2015 following the possible offer for AstraZeneca plc by Pfizer Inc., where an actual or potential bidder or target intends to make a statement during an offer period about a future course of action that it proposes to take or not take, it must decide whether it wishes to make either:
- A firm, binding commitment (known as a “post-offer undertaking”) governed principally by Rule 19.7 of the Code. Among other things, such an undertaking must specify any period of time for which it applies or any deadline by which the course of action will be completed, and prominently state any qualification or conditions to which it is subject; or
- A statement of intention (known as a “post-offer intention statement”), governed principally by Rule 19.8. Such a statement must be an accurate statement of the party’s intentions at the time that the statement is made and based on reasonable grounds. A party making a post-offer intention statement is not bound to implement the intended course of action but, if it changes its mind, it must make an announcement explaining why.
A party that makes a post-offer undertaking must provide the Panel with periodic written reports, approved by the party’s board of directors, “in such form as the Panel may require”, detailing progress made to date in complying with the undertaking and the expected timetable for completion. The Panel may, at its discretion, require any such report to be published “in whole or in part”. In addition, the Panel can require an independent supervisor to be appointed, on terms agreed by the Panel, to monitor compliance with the post-offer undertaking, and to submit written reports to the Panel, each at the cost of the party concerned.
In practice, the Panel has required a bidder or target that has made a post-offer undertaking to publish, in whole or in part, any report submitted to the Panel. It has therefore decided that, where a bidder or target has made a post-offer undertaking, the requirement for it to publish, in whole or in part, any report submitted to the Panel should apply in all cases, and not only at the discretion of the Panel; and that, where the post-offer undertaking has a duration of longer than a year, such reports should be published at least annually.
Post-offer intention statements
Given the interest of post-offer intention statements to stakeholders in the target, the Panel believes that, where a bidder or target has made such a statement, it should be required, at the end of the period of 12 months from the date on which the offer period ends (or such other period of time as was specified in the statement) to confirm in writing to the Panel whether it has taken, or not taken, the course of action described in the post-offer intention statement. Such confirmation will have to be announced via a RIS. The Panel says it would expect any such confirmation to be relatively brief and not contain material new information, on the basis that any deviation from the post-offer intention statement should already have been announced.
The change builds on the Panel’s current practice of asking the bidder or target to confirm privately at the end of the relevant period that it has taken the course of action specified in its post-offer intention statement.
More time for a target to respond to a unilateral offer
Under Rule 24.1(a) a bidder must normally publish its offer document within a maximum of 28 days of the announcement of its firm intention to make an offer. However, bidders often wish to publish their offer document as soon as possible – for example, to reduce the time for a potential competing bidder to prepare an offer and, in the case of a unilateral (hostile) offer, to increase the pressure on the target’s board.
Where a unilateral bidder publishes an offer document shortly after the announcement of its firm intention to make an offer (which in some cases will be the first time that the target knows of the bid), the Panel believes that the target’s board should have more time than the 14 days currently provided by Rule 25.1(a) in order to formulate its opinion on the offer, and its impact on the target’s employees etc, and otherwise to prepare its initial arguments and defence against the bid.
Accordingly, under an amended Rule 24.1(a) a bidder must not publish its offer document for at least 14 days from its firm offer announcement unless the target’s board consents. In the context of a unilateral offer, the target’s board will therefore know that it has at least 28 days from the date of the firm offer announcement until it must publish its initial response circular. The 14 day restriction will also apply to any subsequent competing bid.
Another consequence of this change is that a unilateral bidder will not be able to rush its offer document out immediately after making its firm offer announcement and then start stakebuilding. Shares bought in the market count towards the 90% squeeze-out threshold only if they are purchased after the offer document has been published, so most bidders are likely to feel it necessary to wait until the offer document has been published (14 days after the firm offer announcement) before buying target shares in the market.
Timing of the changes
The changes will apply to all companies and transactions, including transactions that are ongoing on 8 January 2018, except to the extent that to do so would give any amendment retroactive effect. In particular:
- If a bidder makes a firm offer announcement before 8 January 2018, but publishes its offer document on or after that date, the offer document must include the additional information about the impact of the transaction on the target’s employees etc that is required by the amended Rule 24.2.
- A bidder that has not, before 8 January 2018, published an offer document in respect of a firm offer announcement made before that date, must not publish the offer document before the expiry of 14 days from the date of its firm offer announcement without the consent of the target’s board.
Documents and background
The changes to the Code are set out in Response Statement RS 2017/2, which was published on 11 December 2017.
For more information about post-offer undertakings and post-offer intention statements see our LawNow articles published on 22 July 2016, “SoftBank takeover of ARM - first test of Takeover Panel rules on post-offer undertakings” and on 21 January 2015, “Takeover promises: a firm commitment or only a statement of intent? New rules come into force”.
The Government’s proposals to reform and strengthen its powers for scrutinising the national security implications of particular types of investments, which were published in October this year, can be found here.