Under Rule 21.2 of the Code, arrangements between a bidder and the target are, broadly, prohibited subject to limited exceptions. New Practice Statement 29 ("PS 29") provides guidance on the Panel's approach to those exceptions and, in particular, its treatment of:
- reverse break fees; and
- bid conduct agreements.
Reverse break fees
Where a transaction is not a reverse takeover, Rule 21.2 permits a bidder and target to enter into an agreement or arrangement which imposes obligations only on the bidder (or any person acting in concert with it). This includes a commitment from the bidder to pay a reverse break fee to the target.
PS 29 clarifies that the Panel considers it would be permissible for such a commitment to be made conditional upon target having taken or not having taken certain action, as long as:
- there is no obligation on the target to take, or not to take, that action; and
- the conditions would not deter potential competing bidders from making an offer or result in a bidder making an offer on less favourable terms than it would otherwise have done.
The Panel considers that conditions which would deter a potential bidder or result in a bidder making an offer on less favourable terms would include, for example, conditions that target:
- does not engage in discussions with competing bidders;
- does not provide information to competing bidders beyond that required under the Code;
- notifies the bidder of any approach by a competing bidder and/or the terms of any such approach; or
- affords the bidder an opportunity to match or improve upon a higher competing offer before the target board recommends that target shareholders should accept the competing offer.
The Panel also states that it considers it would normally be permissible for a reverse break fee to be conditional on the target board continuing to recommend the bidder's offer. This is because, whilst a commitment by the target board to recommend the offer would not be permitted, the Panel accepts that it would normally be inappropriate for the bidder to be required to pay a reverse break fee where its offer lapses as a result of the target board withdrawing its recommendation.
Bid conduct agreements
A bid conduct agreement is an agreement between a bidder and the target relating to the conduct, implementation and/or terms of the offer. PS 29 makes it clear that the provisions of such an agreement are prohibited under Rule 21.2 unless they fall within one of the permitted exceptions. Indeed, the Panel is keen to point out that it is the responsibility of the bidder and the target and their respective advisers to ensure that the agreement onlycontains provisions which are permitted by one of the exceptions. PS 29 usefully sets out a list of seven provisions which the Panel will not consider as being permissible (click here to see the list).
Whilst the Panel will not pre-approve bid conduct agreements, it advises that if there is any doubt as to whether a proposed provision complies with Rule 21.2, it should be consulted at the earliest opportunity. PS 29 makes it clear that when a bid conduct agreement is published on a website (as it has to be under the rules of the Code), if the Panel identifies any provision in it which it considers to be in breach of Rule 21.2, it will initiate remedial action and may start disciplinary action.
In order for a bidder and the target to be able to comply with any direction made by the Panel, it advises that they should include the following wording in their agreement:
“The parties agree that, if the Takeover Panel determines that any provision of this agreement that requires the offeree company to take or not to take action, whether as a direct obligation or as a condition to any other person’s obligation (however expressed), is not permitted by Rule 21.2 of the Takeover Code, that provision shall have no effect and shall be disregarded.”.
Other offer-related agreements
As noted, PS 29 also incorporates the content from old practice statement 23 (inducement fees and other related arrangements – now in section 8 of PS 29), and old practice statement 27 (directors' irrevocable commitments and letters of intent – now in section 4 of PS 29). Both have been incorporated without change, and were withdrawn with effect from 8 October 2015 when PS 29 came into force. PS 29 also deals with:
- commitments to provide information or assistance for the purpose of obtaining official authorisations or regulatory clearances, including agreements relating to the invocation of conditions to an offer, and
- agreements relating to existing employee incentive arrangements.
To read the full practice statement, click here.
How information relating to the seeking of regulatory approvals can be provided to more than one bidder
A key principle of the Code is that information shared by target with one bidder must be shared with any other bidder if requested by it (Rule 20.2).
In certain situations, a target may wish to disclose commercially sensitive information ("restricted information") only to specific advisers of a bidder (a "clean team"). This is most likely to arise where provision of the restricted information could run the risk of a competitive advantage being obtained by a bidder before merger clearance has been obtained and the parties, therefore, falling foul of anti-trust laws.
New Practice Statement 30 ("PS 30") sets out the measures that a target should take when providing restricted information to a bidder's clean team. The Panel will want to be satisfied that these measures have been complied with before it will apply Rule 20.2 in such a way as to permit the target to provide the same restricted information in the same limited manner to another bidder.
Whilst PS 30 makes it clear that the Panel will consider all relevant factors it specifies (without limitation) the following:
- the number of individuals in the clean team must be kept to an absolute minimum,
- the clean team must not include any director or employee of the bidder or any of its other advisers,
- effective procedures and information barriers must be in place to ensure the restricted information does not find its way into the hands of anyone outside the clean team – whilst the Panel does not believe it is appropriate for it to specify detailed requirements for such procedures and barriers, it does consider that the restricted information must be stored in protected files (electronic or otherwise) which may only be accessed by members of the clean team,
- communications from the clean team to the bidder or anyone else outside the clean team must not disclose any restricted information or any information which could enable it to be deduced – in particular, any restricted information included in an application for or any other correspondence with the relevant regulatory body must be redacted from any drafts given to the bidder or any of its advisers who are not on the clean team – the Panel considers that an individual at the clean team's principal advising firm should be appointed to review all communications from any member of the clean team to ensure compliance with this measure, and
- if the bidder or any of its advisers (other than a member of the clean team) is to participate in any meetings or telephone calls etc with the relevant regulatory body, or may receive correspondence from that body, appropriate measures must be put in place (including informing the regulatory body of the need to protect the confidentiality of the restricted information) to ensure no restricted information is provided to them.
In addition to implementing the above measures, the following details and confirmations will need to be given in writing to the Panel:
- a list of the key individuals in the clean team including their positions and roles on the deal;
- the name of the individual at each firm represented on the clean team responsible for ensuring that the procedures and information barriers referred to above will be implemented and complied with by that firm, and the name of the individual at the principal advising firm responsible for ensuring that no clean team member discloses any restricted information (or any information which could enable it to be deduced);
- confirmation from the bidder that:
- it waives any rights to request restricted information from the clean team and waives any legal or professional obligations of disclosure which any member of the clean team may owe the bidder in respect of restricted information;
- none of its directors or employees will receive or have access to restricted information until the offer becomes unconditional; and
- it will promptly inform the Panel if any restricted information comes into its possession; and
- confirmation from each firm represented on the clean team that:
- it will not disclose any restricted information, or other information which enables it to be deduced, to the bidder or any person outside the clean team (other than the relevant regulatory body);
- effective information barriers and procedures have been implemented; and
- it will promptly inform the Panel if it becomes aware that any restricted information has come into the possession of anyone other than the clean team.
Where the Panel has agreed to apply Rule 20.2 in accordance with PS 30, the target need then only provide a competing bidder, on request, with the same restricted information on the same limited basis, and subject to the same confirmations, as was provided to any prior bidder in accordance with PS 30.
If, despite the application of PS 30, any restricted information, or any information which enables it to be deduced, does come into the hands of a bidder or its advisers (other than those on its clean team), the Panel considers that the provisions of Rule 20.2 should apply in the usual way to that information such that the same restricted information should then be provided to any competing bidder on request.