On 15 September, the UK Takeover Panel (the Panel) issued a consultation paper in which it proposed changes to the City Code (the Code) relating to statements by bidders and target companies concerning actions which they commit or intend to take, or not take, after the end of the offer period1.

The consultation closes on 24 October 2014. The new rules are expected to come into force at the end of the year.

Background

In May 2014, in light of the political controversy relating to its proposed merger with AstraZeneca plc (AstraZeneca), Pfizer Inc. (Pfizer) stated that, subject to completion of the merger, it would commit to, among other things: (i) completing the construction of AstraZeneca’s planned research and development hub in Cambridge; (ii) basing key scientific leadership in the UK; (iii) employing a minimum of 20% of the combined group’s total research and development workforce in the UK; and (iv) retaining substantial manufacturing facilities in Macclesfield. These commitments, which were made in a letter from Ian Read, Pfizer’s chief executive officer, to the Prime Minister David Cameron, and which were expressed to be made for a minimum of five years, were highly unusual. Normally, where such statements are made in connection with a takeover bid in the UK, they are expressed as statements of intention rather than as commitments, and are generally more limited in time (normally lasting 12 months).

The proposed changes are intended, among other things, to clarify the status of voluntary commitments of this sort and to provide a robust framework within which they may be enforced by the Panel, given that such commitments are likely to be made in order to secure shareholder and other stakeholder support for a bid and the desirability of ensuring that parties to a bid should be held to what they say.

Comment

The proposed changes are significant. They would mean that great care will be required before giving a post-offer undertaking or making a post-offer intention statement. Parties to a bid are likely to be more circumspect about giving any post-offer undertakings unless, given the level of political/press focus on the bid, such a statement is of critical importance (as it was with Pfizer/AstraZeneca). Where such statements are made, they are likely to be subject to more, and more detailed, qualifications and conditions.

More generally, the rules represent another subtle shift in the focus of the regime for public takeovers provided for by the Code. Traditionally, the Code was, to a high degree, focused on protecting the interests of target company shareholders. The proposed changes  continue the trend towards also seeking to protect the position of target company employees (seen most recently with the changes made to the Code in September 2011 in relation to bid disclosures affecting target company employees, and in relation to the role of employee representatives, following the controversial bid by Kraft Foods Inc. for Cadbury plc2). In the longer term, the continuation of this trend may prove to be more significant than the detailed rule changes themselves.

Finally, as with the changes to the Code which were introduced following the Kraft/Cadbury bid, the proposed changes illustrate how one relatively unusual but high profile situation can result in significant changes to the UK takeover regime.

Current rules

Under Rule 24.2 of the Code, a bidder must, in its offer document, state its intentions with regard to, among other things, (i) the future business of the target and (ii) the continued employment of its employees and management and its strategic plans for the target and their likely repercussions on employment and the locations of the target’s places of business. If the bidder does not intend to make any changes in relation to those matters, it must make a statement to that effect.

Under Note 3 to Rule 19.1 of the Code, if a party to a bid makes a statement in any document, announcement or other information published in connection with the bid relating to any particular course of action to be taken, or not taken, following the bid that party will be regarded 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 so whether the statement is expressed as being a “statement of intention” or a “commitment”. For this purpose, the Code deems statements of intention to be binding commitments.

If, within the relevant period, the Panel considers that there is a reasonable likelihood that a party to a bid would fail to act in accordance with a statement of intention (including a voluntary commitment) which it has made, it may give a direction to secure compliance with the rules and can apply to the court for an order. The court may make any order it thinks fit to secure such compliance.

If, however, the Panel determines that a party to a bid has failed to act in accordance with a statement of intention (including a voluntary commitment), it may not be possible for the Panel to give a direction to secure compliance. For example, it might be impractical for a bidder to comply with a direction or order to repurchase a factory that it had sold, contrary to an undertaking not to do so. In such a situation, the Panel may have no other option but to exercise its disciplinary powers.

Proposed changes

  1. Requirements in relation to “post-offer undertakings”

The proposed rules distinguish between:

  • “post-offer undertakings”, i.e. statements relating to any particular course of action that a party to a bid commits to take, or not take, after the end of the offer period; and
  • “post-offer intention statements”, i.e. statements relating to any particular course of action that a party to a bid intends to take, or not take, after the end of the offer period.

Under the proposed rules, a party to a bid will be required to comply with the terms of any post-offer undertaking which it makes for the period of time specified in the undertaking and to complete any course of action it committed to take by the specified date. It will also be required:

  • to consult the Panel in advance of making the post-offer undertaking;
  • expressly to state that it is making a post-offer undertaking;
  • to specify the period of time for which the post-offer undertaking is being made or the date by which the course of action committed to will be completed; and
  • to state prominently any qualifications or conditions to which the post-offer undertaking is subject.

Under the proposed rules, any post-offer undertaking, including the course of action committed to be taken, or not taken, and the qualifications or conditions to which the post-offer undertaking is subject, must be specific and precise, be readily understandable and capable of objective assessment, and must not depend on subjective judgments of the party to the bid or its directors. To that end, the proposed rules do not permit a party to a bid to include qualifications and conditions with regard to a “material change of circumstances”, directors’ “fiduciary duties”, or unspecified events of “force majeure”. A general reference to acts, events or circumstances which are beyond the party’s control would not be sufficiently precise for this purpose.

The new rules do not limit the number or scope of qualifications or conditions to post-offer undertakings or require that they be “material”. However 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.

The new rules would require any post-offer undertaking which has been made by a party to a bid otherwise than in a document published by that party in connection with the bid (e.g., in an announcement or other public statement) to be included in the next document published by that party in connection with the bid.

These requirements will not apply to commitments or undertakings given by a party to a bid to one or more identified parties, including a government agency such as the Competition and Markets Authority (CMA). The Panel expects that such committments would be enforced by means of the appropriate contractual or other regime applicable to the commitment or undertaking in question.

  1. Monitoring and enforcement of post-offer undertakings

The proposed rules would also enhance the Panel’s ability to monitor compliance with post-offer undertakings by:

  • requiring a party to a bid which makes a post-offer undertaking to provide periodic written reports to the Panel: These must, among other things, indicate whether any course of action that the party has committed to take has been completed within the specified period of time and, if not, the progress made to date, the steps being taken to implement or complete the course of action and the expected timetable for completion. The new rules would also allow the Panel to require such reports to be published via a Regulatory Information Service;
  • enabling the Panel to require the appointment of an independent supervisor to monitor compliance with a post-offer undertaking: This would be similar to the ability of the CMA under the Enterprise  Act 2002 to require the appointment of “monitoring trustees” to monitor the compliance of merger parties that have agreed to undertakings with the CMA. The costs of the supervisor would be met by the party to the bid which made the post-offer undertaking; and
  • requiring such a party to obtain its consent before relying on a qualification or condition to a post- offer undertaking: In deciding whether to permit a party to do so, the Panel may invite submissions from persons who it considers would be likely to be affected by such a ruling.
  1. Requirements in relation to “post-offer intention statements”

The new requirements in relation to post-offer undertakings would not apply to post-offer intention statements. The new rules would, however, require such a statement to be an accurate statement of the relevant party’s intention at the time that it is made and to be made on reasonable grounds. If the party concerned subsequently wishes to take a course of action different from its stated intentions, or not to take a course of action which it had stated it intended to take, the new rules would require that party to consult the Panel. In the consultation paper, the Panel makes clear that it would, in those circumstances, expect that party to show a good reason for taking a course of action different from its stated intentions or for not taking a course of action which it had stated it intended to take.

If the Panel determined that a breach of the Code had occurred, it could commence disciplinary proceedings.