Pfizer’s announcement of a possible offer for AstraZeneca on 2 May 2014 re-ignited a long-running debate about whether it is too easy for overseas companies to acquire publicly quoted UK companies (or, strictly in this case, a publicly quoted Anglo-Swedish company). In the wake of arguments over the impact of Pfizer’s potential bid on the UK lifesciences industry, there have been renewed calls for overseas takeovers of UK businesses to be subject to a new or extended “public interest test”.
Similar calls most recently made headlines in connection with US food giant Kraft’s £11.4bn acquisition of Cadbury in January 2010, when Kraft closed Cadbury’s Somerdale factory notwithstanding a pre-takeover pledge to keep it open. Despite the political, media and public fall-out at the time, and the extensive review of the UK takeover rules that followed, the Government ultimately stated it was satisfied that existing powers to intervene in UK mergers on public interest grounds were sufficient.
The size and geographic breadth of the two companies mean that any bid for AstraZeneca by Pfizer would fall under the EU Merger Regulation, rather than the UK merger regime. Under EU rules, a Member State can intervene in certain mergers in order to protect its “legitimate interests”. There are three specified categories (public security; plurality of the media; and prudential rules), none of which would seem to apply. Although Member States can ask the European Commission to extend the categories, any extension would have to be compatible with the general principles and other provisions of EU law (in particular in relation to the free movement of capital), and could well be challenged by other Member States or by Pfizer. It is therefore unlikely that the Commission will recognise a new category based on a Member State’s “economic interests” or any similarly wide basis, particularly not in the timescale needed to block a deal between Pfizer and AstraZeneca.
Pfizer, of course, knows that the Government’s chances of blocking the deal outright are slim. But recognising that the Government may have other weapons at its disposal, 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 has 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 will “look to locate manufacturing operations of the combined company in the UK, subject to the timing of the UK Patent Box proposals, and will retain substantial commercial manufacturing facilities in Macclesfield.” Pfizer has made these commitments “for a minimum of five years, recognizing our ability, consistent with our fiduciary duties, to adjust these obligations should circumstances significantly change”. If it makes a firm offer for AstraZeneca, Pfizer has said that such statements will be repeated in its offer document.
Although Pfizer has repeatedly described these commitments as “legally binding”, some MPs and members of the Government have said that they are far from watertight, and are seeking more “cast iron” commitments. So who is right?
Not surprisingly, Pfizer has reserved its right to “adjust” any or all of the commitments if “circumstances significantly change”, citing its directors’ fiduciary duties. Certainly it is possible that, without a “significant change” reservation, Pfizer’s directors would risk being sued by the company’s shareholders in the US courts, particularly given the scale and financial implications of the commitments. Clearly, however, not all unqualified commitments, particularly for shorter periods, would carry such a risk. There may therefore be room for Pfizer to offer some more specific or shorter-term commitments – for example, it may be able to offer some without a “significant change” reservation, perhaps for a shorter period of time; specify in more detail the types of circumstances in which Pfizer can “adjust” its commitments; and/or specify a “plan B” that it would try to follow in such circumstances. Such amended commitments might be enough to satisfy the politicians while leaving enough room for Pfizer’s directors to take decisions in what they regard as the company’s commercial interests.
Leaving aside the “significant change” reservation, are Pfizer’s promises legally binding? Under Note 3 on Rule 19.1 of the UK Takeover Code, which was introduced in light of Kraft’s breach of its commitment regarding Cadbury’s Somerdale factory, if a firm offer is made, Pfizer will be regarded by the Takeover Panel as being “committed to [its stated] course of action for a period of 12 months from the date on which the offer period ends, or such other period of time as is specified in the statement [i.e. five years, based on Pfizer’s commitments to date], unless there is a material change of circumstances”. Pfizer might therefore be able to persuade the Panel that its commitments (or perhaps certain of them) no longer apply because there has been a “material” change of circumstances. No guidance has been published by the Panel as to what might constitute a material change of circumstances, but the Panel is likely to set the threshold fairly high.
If the Panel were not persuaded that a material change of circumstances had occurred, how could it force Pfizer to honour its commitments? Under the Companies Act 2006, the Panel has the power to apply to the UK courts for an order compelling a person to comply with, or to prevent him from breaching, any rule of the Takeover Code. However, such a power has, it is believed, never yet been used; and with commitments like Pfizer’s that are broad-ranging in scope and duration, and open to different interpretations, a court might well be reluctant to make an order that could be difficult for it to police. In practice, the Panel usually relies on its long-standing powers to privately or publicly censure a bid participant (Kraft was publicly censured in connection with its closure of the Somerdale factory) or, exceptionally, to “cold shoulder” someone who it regards as unlikely to comply with the Takeover Code. Cold-shouldering effectively excludes a person from engaging in further UK takeover activity for a specified period. The threat of public censure and the ultimate sanction of cold-shouldering is usually enough to persuade large corporates and their advisers to comply with the Takeover Code.
So it is true to say that Pfizer’s commitments, if repeated in the offer document, would be capable of being legally enforced, although by the Takeover Panel rather than by AstraZeneca or any of its stakeholders (and any such enforcement would be unprecedented). But it is also true, as some MPs have said, that the commitments given by Pfizer, at least in their present form, allow it to change its plans if circumstances change “materially” or “significantly”.