During its unsuccessful takeover bid for AstraZeneca plc in 2014, Pfizer made a series of significant voluntary commitments for a minimum of five years in relation to retaining certain operations and businesses in the UK. It described these as "legally binding" in a letter to the UK Prime Minister and before a House of Commons Business Committee.
This reignited the debate about the making of such promises and the ability of the Panel on Takeovers and Mergers (Panel) to monitor and enforce them which had started in 2010 with Kraft's failure to honour its publicly stated commitment to keep open the UK chocolate maker Cadbury's Somerdale factory.
As a result, the changes discussed in this Bulletin were made to the City Code on Takeovers and Mergers (Code) and took effect on 12 January 2015.
The Code did not distinguish between POUs and post offer intention statements (POIs) - all post-offer statements of intention were regarded as binding for at least a year from the end of the offer period (absent a material change of circumstances).
As a result, bidders had developed the practice of making short non-informative statements in compliance with their Code obligation to disclose their intentions towards the offeree's business and employees. This was to avoid having to adhere to more detailed statements, given that these were regarded as binding.
Objectives of the new regime
Therefore, by distinguishing between POUs (binding) and POIs (non-binding), the Panel aimed to:
- encourage bidders to make more informative POIs on the basis that POIs are not binding in the same way as POUs;
- provide clarity for shareholders and other stakeholders as to the status of statements made by bidders and target companies in relation to the action they will, or will not, take following an offer; and
- increase the effectiveness of the enforcement tools available to the Panel when POUs are made.
Considering the differences in more detail:
The new definition in the Code provides that a POU is:
"a statement made by a party to an offer in any document, announcement or other information published by it 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."
Furthermore, Panel consultation is required on all POUs as the Panel may decide a proposed POU is more appropriate in a different form (e.g. private contract) or, conversely, that a proposed commitment is more appropriate as a POU.
Any POU must:
- be specific and precise, state that it is a POU and be readily understandable and capable of objective assessment;
- specify the period of time for which it is made or the date by which the course of action committed to will be completed; and
- prominently state specifically and precisely any qualifications or conditions to which it is subject and not depend on subjective judgements of the party to the offer or its directors. "Material change of circumstances", "directors' fiduciary duties" or "force majeure" are unlikely to be permitted but the Director General of the Panel recently stated that an event such as the drop in the oil price may qualify if its effect on the relevant party or its assets is properly described.
In terms of enforcement, the Panel has a range of powers. It may require periodic written reports on the status of the bidder's implementation of POUs and, in cases such as the Pfizer case, the appointment of an independent supervisor (at the cost of the bidder) to monitor compliance with a POU. Ultimately the Panel can enforce POUs by court order.
The new definition in the Code provides that a POI is:-
"a statement made by a party to an offer in any document, announcement or other information published by it 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."
Any POI must (i) be an accurate statement of a party's intention at the time that it is made; (ii) be made on reasonable grounds; and (iii) only be deviated from with the Panel's consent whereupon an announcement must be made promptly.
In our view this apparent relaxation in the rules is deceptive and it is probably more accurate to view the new rules as giving offerees a new weapon in the shape of POUs rather than making life any easier for bidders.
Harking back to the Kraft bid and the emotive issue of the local factory closure by a new and unwelcome overseas bidder, it may be recalled that the no-closure statement was made in the context of a hostile takeover bid. This meant that Kraft was able to do only limited financial due diligence on Cadbury. When it eventually acquired control (the Cadbury board having resisted the bid until the eleventh hour), Kraft realised it was a financial impossibility to keep the factory open and was forced to renege upon its statement.
Therefore, despite the fact that the Kraft statement would undoubtedly have been characterised as a POI rather than a POU, Kraft would not have escaped censure under the new regime as the statement, whilst an accurate statement of Kraft's intention at the time it was made, was not made on reasonable grounds.
The fact that the statement was binding under the old regime but would not have been binding as a POI seems to us a legal technicality making little practical difference to the outcome for the bidder.
However, it has been our experience in transactions since the new rules came into force, that the Panel is adopting an approach of prevention rather than cure. Whilst not required under the Code, in practice bidders have been asked to submit to the Panel for its prior approval a schedule of all POUs and POIs to be included in the offer document. Therefore, perhaps this "early warning system" might have meant that the Kraft statement would not have been permitted in the first place and the political and media furore avoided.
Finally, whilst, prior to the new rules coming into force, commitments which might now be characterised as POUs had been rare (only a handful in the last hundred or so bids), it seems likely that offeree boards will take advantage of the new rules to push bidders to upgrade POIs to POUs as the price of a recommendation.
For example, we recently acted for the bidder on a take-private transaction where the offeree board sought to ensure that the bidder committed for 5 years to certain minority protections for remaining shareholders by means of a POU.
In that case we were able to argue successfully that the offeree had no need of the additional enforcement firepower of a POU given the restrictions surrounding the giving (and remedies for the breaching) of POIs as referred to above.
However this is probably a negotiation that bidders can expect to have to engage in more and more frequently, particularly in respect of any long term commitments where the Panel's monitoring powers in respect of a POU become of greater relevance.