The Takeover Panel (the Panel) has published public consultation paper PCP 2014/2 which proposes to introduce a new framework into the Takeover Code (the "Code") for the regulation of statements made by any party to an offer (that is, a bidder and the target) which relate to any particular course of action they commit to or intend to take (or not take) after the end of the offer period.
The current position
Currently, Rule 24 of the Code requires a bidder to state its intentions in respect of, amongst other things, the future business of the target, the continued employment of target employees, its strategic plans for the target and contributions to defined benefit target pension schemes. If a bidder has no intention to make any changes in respect of these matters, it has to make a statement to that effect.
Where a party to an offer makes a statement relating to any particular course of action to be taken (or not taken) following the offer, it is regarded, under the Code, as being committed to taking (or not taking) that course of action for a period of 12 months (or such other period of time as is specified in the statement), unless there is a material change of circumstances. This is the case regardless of whether the statement is expressed as being a “statement of intention” or a “commitment”. In effect, therefore, the Code deems a statement of intention, including any statement made by a bidder in compliance with Rule 24, to be a commitment.
Although the obligations in Rule 24 were introduced with the intention of increasing useful disclosure for shareholders, employees and pension trusts, so that they could better evaluate the offer, they have traditionally resulted in fairly bland statements. The Panel considers that the Code provision which effectively treats statements of intention as binding commitments may deter parties to an offer from making informative statements as to their intentions for the business and employees of the target. This is one of the reasons why the Panel is considering drawing a distinction between statements of intention and statements of commitment (undertakings).
The proposed new framework for statements of intention
Under the proposed new framework, it is intended that statements of intention be treated slightly less strictly than under the current regime where, as noted, they are effectively treated as commitments. They will also be subject to far less rigour than will apply to the new concept of post-offer undertakings.
Nonetheless, the Panel believes that the Code should require a post-offer intention statement to be both:
- an accurate statement of that party’s intention at the time that it is made, and
- made on reasonable grounds.
It is proposed that a post-offer intention statement will be defined as:
"a statement made by a party to an offer in any document, announcement or other information published in relation to the offer relating to any particular course of action that the party intends to take, or not take, after the end of the offer period, other than a post-offer undertaking".
The PCP proposes that if a party to an offer has made a post-offer intention statement and, during the 12 months following the end of the offer period (or such other period of time as was specified in the statement), that party decides to deviate from its stated intention, it must consult with the Panel. In this respect, the PCP notes that, when the Panel considers whether a breach of the Code may have occurred when the party to the offer made the statement, the principal factors that it would be likely to take into account would be:
- whether the party can demonstrate that it has good reason for taking a course of action different from its stated intentions, and
- the period of time which has elapsed between the making of the statement and the date on which the party wishes to deviate from it.
In contrast to a post-offer intention statement, a party to an offer who makes a post-offer undertaking will be required to comply with it for the period of time specified in the undertaking and to complete any course of action committed to be taken by the specified date. To ensure compliance, it is proposed that post-offer undertakings be subject to various controls such as written reports on progress and, potentially, the appointment of an independent monitor. Whilst an undertaking can be made subject to certain qualifications or conditions, this will be narrowly interpreted. A post-offer undertaking can only be made with the prior approval of the Panel. The key proposals are summarised below.
Definition and terms
A post-offer undertaking will be defined as:
"a statement made by a party to an offer in any document, announcement or other information published in relation to the offer relating to any particular course of action that the party commits to take, or not take, after the end of the offer period and which is described by that party as a post-offer undertaking".
Such an undertaking will have to:
- state that it is a post-offer undertaking,
- specify the period of time in which it will be completed, and
- prominently state any qualifications or conditions to which it is subject.
The terms of the undertaking, including the course of action committed to be taken (or not taken), and the qualifications or conditions to which it is subject, will have to be:
- specific and precise,
- readily understandable and capable of objective assessment, and
- not dependent on subjective judgements of the party giving the undertaking or its directors.
Compliance measures - written reports
Every party to an offer which makes a post-offer undertaking will have to submit written reports to the Panel at such intervals and in such form as the Panel may require. Each report will have to:
- indicate whether any specified course of action has been implemented or completed within the specified time and, if not, the progress and steps being taken to implement or complete the course of action and the expected timetable for completion,
- confirm that any course of action the party has committed not to take has not been taken,
- include such documents or information as the Panel may require, and
- state that it has been approved by the board of directors and be signed by a duly authorised director.
The Panel may require that written reports must be published.
Compliance measures - appointment of independent supervisor
The Panel may require a party to an offer which has made a post-offer undertaking to appoint a supervisor to:
- monitor compliance with that undertaking, and
- submit written reports to the Panel.
Such a supervisor must be independent of the party to the offer concerned (and any person acting in concert with it), and must have the skills and resources necessary to perform the functions of a supervisor. The identity of the supervisor and the terms of appointment must be agreed by the Panel. The costs of the supervisor will be met by the party to the offer which has made the post-offer undertaking.
Qualifications and conditions
If a party to an offer which makes a post-offer undertaking wishes to be excused from compliance in the event of certain acts, events or circumstances, it will have to state prominently in the undertaking specific and precise details of the relevant acts, events or circumstances. The PCP notes, for example, that the Panel does not consider that a party to an offer should be permitted to include qualifications and conditions with regard to:
- a “material change of circumstances”,
- directors’ “fiduciary duties”' or
- unspecified events of “force majeure”.
In addition, the Panel notes that the strength of any undertaking (and, therefore, the extent to which it achieves its objectives) may be diminished as the scope and number of qualifications and conditions increases or if immaterial qualifications and conditions are included.
In order to rely on a qualification or condition, the party to the offer concerned must obtain the Panel’s prior consent and, if such consent is granted, must promptly make an announcement describing the revised course of action it has taken (or not taken), and explaining how and why the relevant qualification or condition applies.
As the Panel notes, in its introduction to the PCP, it is, even now, unusual for a bidder to express its future plans as commitments rather than intentions, and it seems unlikely that bidders will change this practice, particularly in the light of the Panel's proposed enforcement powers.
So the focus of the PCP seems to be to ensure that bidders only make binding commitments with their eyes wide open and that there is an enforcement mechanism in place for the rare occasions where they might do so. It is to be hoped that the effect of the proposed changes will at least be to encourage better disclosure of intentions.