On 17 January 2014, the Takeover Panel published practice statement 27 (PS 27) which clarifies how it interprets and applies Rule 21.2 of the Takeover Code in relation to irrevocable commitments and letters of intent given by target shareholders who are also target directors.
Rule 21.2 relates to inducement fees and other offer-related arrangements. It was introduced in 2011 together with a raft of other changes designed to re-balance a playing field that was perceived to have come to favour bidders over targets. A source of such inequality was in respect of deal protection measures where it was increasingly felt that, when presented with such provisions, targets had little bargaining power in resisting them. As the 2011 changes were aimed at equalising the balance of power between targets and bidders, offer-related arrangements, including deal protection measures, were outlawed subject to limited exceptions.
Since implementing the prohibition, the Panel has been concerned that when parties to an offer are agreeing the terms of certain exempted arrangements, prohibited terms have begun to be included.
Rule 21.2 provides that, except with the consent of the Panel, neither the target nor anyone acting in concert with it may enter into any offer-related arrangement with either the bidder or anyone acting in concert with it. Under the Code's definition of acting in concert, target directors are presumed to be acting in concert with the target. Therefore, the prohibition extends to offer-related arrangements between any target director who is also a shareholder and a bidder (or anyone acting in concert with it).
Offer-related arrangements are defined as being any agreement, arrangement or commitment in connection with an offer, including any inducement fee arrangement or other arrangement having a similar or comparable financial or economic effect. However, the Code recognises that certain arrangements may be fundamental to effecting an offer successfully, such as confidentiality and non-solicitation undertakings. Therefore, certain types of arrangement are excluded from the prohibition. The exclusion includes irrevocable commitments and letters of intent which are often agreed to by target shareholders who are also directors.
What is not acceptable
Whilst the Panel considers that a target shareholder who is also a target director may 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 target shares held or controlled by the individual concerned, PS 27 makes it clear that other kinds of offer-related arrangement should not be included.
PS 27 sets out provisions which have appeared in irrevocable commitments and which the Panel regards as being in breach of Rule 21.2. These include commitments:
not to solicit a competing offer
to recommend an offer to target 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 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’s business in a particular manner during the offer period.
The Panel considers that the types of commitment outlined above extend beyond the relevant individual’s decision to accept an offer (or to vote in favour of a scheme of arrangement). It regards such commitments as having been entered into in the relevant individual’s capacity as a target director and, as such, to be in breach of Rule 21.2. PS 27 clarifies that this would be the case even if the commitments were stated to be subject to the relevant director’s fiduciary or statutory duties.
What is acceptable
The Panel does, however, interpret Rule 21.2 as permitting provisions which are designed solely to give effect to a commitment to accept the offer (or to vote in favour of a scheme of arrangement). PS 27 explains that such permitted provisions may include, 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.
Where there is any doubt as to whether a proposed irrevocable commitment or letter of intent is in compliance with Rule 21.2, the Panel should be consulted at the earliest opportunity.
PS 27 underlines the fact that the Panel is keeping a close eye on how the new rules it introduced in 2011 are being interpreted and that it will take action to ensure they are applied as intended.