A party to a takeover offer that makes a public statement about a course of action it intends to take or not take after the deal is concluded will need to make clear whether the statement is a firm, binding commitment or merely a statement of present intention, under proposed changes to the Takeover Code published by the Panel on 15 September 2014. Such statements are most commonly made by bidders, but are sometimes made by target companies that are fending off an actual or possible bid.
Following Pfizer’s aborted possible offer for AstraZeneca earlier this year, the Panel has decided that the existing Code rules governing such statements need to be refined and strengthened. In its attempts to woo AZ shareholders and pacify concerns among MPs about the effect its offer would have on science and employment in the UK, Pfizer took the unusual step of publishing a letter it sent to the UK Prime Minister setting out its commitment to continue various aspects of Astrazeneca’s lifesciences activities in the UK. Among other things, it committed to complete the construction of the currently planned AstraZeneca campus in Cambridge and “integrate the operations of the combined company so as to employ a minimum of 20% of the combined company's total R&D workforce in the UK going forward”, and said it would “look to locate manufacturing operations of the combined company in the UK, subject to the timing of the UK Patent Box proposals, and [would] retain substantial commercial manufacturing facilities in Macclesfield.” Pfizer made the commitments “for a minimum of five years, recognizing our ability, consistent with our fiduciary duties, to adjust these obligations should circumstances significantly change”. It promised to repeat such commitments in any offer document.
There was much debate about how binding Pfizer’s commitments were, particularly given the “significant change” qualification: for further details see our LawNow published on 20 May this year, “Pfizer’s bid for AstraZeneca: public interest tests and "legally binding" promises”.
Under the new Code rules, this type of qualification will not be permitted. Instead, a bidder will have to decide whether it wishes to make either:
- A firm, binding commitment (to be known as a “post-offer undertaking”). 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. Such qualifications or conditions, and all other terms of the undertaking, will have to be “specific and precise”, “readily understandable and capable of objective assessment” and “not depend on subjective judgements of the party to the offer or its directors”. A post-offer undertaking will need to be discussed with the Panel in advance. Commitments or undertakings given to an identified party, such as a regulator, will not be treated as a post-offer undertaking that can be enforced by the Panel; or
- A statement of intention (to be known as a “post-offer intention statement”), which will have to 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 will not be bound to implement the intended course of action but, if it changes its mind, it will have to make an announcement explaining why. And of course the party concerned may well face questions from the Panel about whether, at the time it made the statement, it did in fact intend to implement the proposed course of action and/or that the intention to do so was based on reasonable grounds.
The party giving a post-offer undertaking will have to comply with it for the period of time specified in the undertaking and must complete any course of action committed to by the deadline specified in the undertaking. A party that wishes to be excused compliance with a post-offer undertaking will have to persuade the Panel that a qualification or condition set out in the undertaking applies and, if the Panel does agree, the party will have to make an announcement explaining how and why the relevant qualification or condition applies.
In order to strengthen the Panel’s ability to monitor compliance with and, therefore, enforce post-offer undertakings, the Panel will get new powers to:
- require a party to an offer which makes a post-offer undertaking to 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; and
- require the appointment of an independent supervisor to monitor compliance with the post-offer undertaking, at the cost of the party concerned. This monitoring power is broadly similar to the power of the UK Competition and Markets Authority under the Enterprise Act 2002 to require the appointment of “monitoring trustees” to monitor compliance by merger parties with interim and/or final undertakings agreed with the CMA.
Consultation on the proposed rule changes closes on 24 October 2014, so the changes are likely to be introduced substantially in the form proposed towards the end of this year or the beginning of next.
Bidder’s plans for the target’s employees, places of business and DB pension schemes
Under the current rules, bidders can (as Pfizer did) voluntarily choose to state their intentions or make commitments in relation to a course of action they intend to take or not take once the deal is completed. In addition, all bidders must state their intentions in relation to the target’s employees, locations of business and fixed assets, and its plans in relation to the target company’s defined benefit pension schemes (including employer contributions and the funding of any scheme deficit). Any statements of intention made by a bidder (whether made voluntarily or not) are effectively viewed as commitments which the Takeover Panel will hold the maker of the statement to for 12 months (or such other period of time as may be specified in the statement) unless there occurs a “material change of circumstances”.
The current regime itself is the result of the controversy that followed a high-profile commitment made by Kraft in its 2010 takeover of Cadbury to keep open Cadbury’s Somerdale factory. Kraft was publicly censured by the Panel for breaching the commitment.
This requirement for bidders to state their intentions in relation to the target’s employees, locations of business, fixed assets and DB pension schemes will continue: bidders will need to decide whether or not such plans should be stated as a firm, binding commitment or merely a statement of present intention.
Bidders will need to consider carefully the extent to which they are in a position to make a firm, binding commitment before they have access to all the relevant information about the target, its employees, facilities, DB pension schemes etc. The Panel expects any statement of intention by a bidder regarding its plans in relation to such matters to be as detailed as is possible on the basis of the information that is known to the bidder at the time the statement is made. While the Panel is more sympathetic to hostile bidders that have not had an opportunity to undertake full due diligence on the target, it said in November 2012 that “statements of a general nature are unlikely to be acceptable in the context of a recommended offer where the offeror has had an opportunity to undertake full due diligence”.
Even so, bidders do not usually include in the offer document many specific details about what they plan to do with the target’s employees and places of business, and sometimes state that a decision will be made following a review of the combined workforce and the needs of the integrated business and, where relevant, after discussions with the trustees of the target’s DB pension schemes. Most bidders will continue to be reluctant to make specific, binding commitments regarding such matters at the time the offer document is published. But target boards should consider pressing bidders for binding commitments on material issues as part of the “price” for the board’s recommending the bidder’s offer.
Clearly, a party giving a firm, binding commitment will want to take steps to ensure that it will be able to complete the promised course of action within the timescale specified. Advisers will also want to ensure that their client has made a proper assessment of the deliverability of the commitments, what could go wrong, and any contingencies that need to be built in. Parties and their advisers will need to consider carefully what, if any, qualifications and conditions should be included in the commitment, and ensure that these – as well as the promised course of action itself – are specific enough and sufficiently capable of objective assessment to satisfy the Panel. The Panel says that it will not permit qualifications that are based on a “material change of circumstances”, directors’ fiduciary duties or unspecified events of force majeure (i.e. that are beyond the party’s control).
The advantages of giving a firm commitment should also be weighed against the potential cost and disruption of having to provide reports to the Panel and/or having an independent supervisor monitoring the party’s compliance with the commitment.
Even where a statement is merely one of intention, the advisers to the party making the statement will want to take appropriate steps, as part of the process of verifying the offer document, to check that the board of their client genuinely has the intention to follow through on it. In order to demonstrate to the Panel – if necessary – that the board had a reasonable basis for its intention, boards would be well advised to record the steps they have taken, and the factors they have considered, in forming the intention.
Where a party is required by the Panel to report on its progress in complying with a post-offer undertaking, it should bear in mind that (unless the Panel amends the proposed rule) the Panel can require the report to be published. It will therefore be important to “stick to the facts”, minimise the disclosure of commercially sensitive information and ensure that the report is properly verified. If the bidder’s shares are quoted on a market, it will also need to consider how the market will react to publication of the report, and whether the company should make a separate announcement.