On 15 September 2014, the Code Committee of the Takeover Panel issued Consultation Paper PCP 2014/2 (the “Consultation”). The Consultation suggested various changes to the Takeover Code (the “Code”) to deal with the treatment of public statements by bidders about how they intend to run the business of a target company following the successful completion of a takeover offer.
The Consultation was driven substantially off two high-profile cases:
In 2011, in reaction to the Cadbury takeover, the Code was amended to clarify that a statement by a bidder as to future plans for a target following a takeover would be regarded as a firm commitment under the Code to take those actions. A breach of that commitment would be a breach of the Code.
A bidder must include statements in its offer document regarding its intentions for the target’s future business, the continued employment of its employees, the strategic plans for the target and their impact on employees, and its plans for funding employer contributions to the target’s pension schemes. Apart from this, the Code does not prescribe what statements of intention a bidder can or cannot make.
In theory, the Panel was previously able to enforce these commitments by issuing an order to comply, seeking a court order, issuing a public or private censure, or (ultimately and only in extreme circumstances) 'cold-shouldering' the bidder.
The public debate over the possible offer for AstraZeneca highlighted the degree of confusion over the Panel's powers in these circumstances. The Panel had virtually no monitoring powers and so, in practice, could intervene only once a breach had taken place. However, after a breach had taken place, in reality the Panel had little power to reverse the parties’ actions and no power to seek damages or impose fines.
From 12 January 2015, the Code distinguishes between two kinds of public statement by a party to an offer:
A post-offer intention statement is precisely that – no more than a statement by a party as to its intentions for the target following a takeover offer. The statement must be made on reasonable grounds and be an accurate reflection of the party's intention at the time it is made. In other words, a party cannot issue intention statements left, right and centre without due consideration.
If the party ultimately decides to depart from its stated intention, it must consult the Panel first. The Panel will assess whether the intention statement was given accurately and on reasonable grounds and, if not, what action to take for breach of the Code.
However, importantly, a party is not formally committed to a course of action set out in a post-offer intention statement, and may abandon that proposal if it so wishes (following consultation with the Panel).
The real power behind the new changes lies in post-offer undertakings.
A post-offer undertaking is a public statement by a party that it will commit to a particular course of action following completion of a takeover offer. Unlike intention statements, a party must comply with a post-offer undertaking unless specific conditions in the undertaking are not met or exceptions set out in the undertaking apply. Failure to comply is a breach of the Code.
(Oral statements and statements made before an offer period begins will not be post-offer undertakings unless they are subsequently repeated in writing during the offer period.)
Although the Panel’s powers to enforce breaches of the Code remain the same, the new regime gives the Panel more power and ability to detect early and potential breaches of post-offer undertakings and so take action quickly. In particular:
In addition, the Panel can require the party to submit regular written reports to the Panel at intervals to be determined by the Panel. These would set out the progress of the matters covered by the undertaking and may need to be publicly disclosed.
The Panel can also appoint an independent supervisor to monitor progress with the subject matter of the undertaking and report back to the Panel. (This is similar to the ability of the Competition and Markets Authority (the “CMA”) to appoint “monitoring trustees” in relation to merger control undertakings.) The bidder must nominate more than one candidate, with the Panel Executive selecting one. The supervisor's fees will not need to be disclosed publicly.
Finally, if a party wishes to invoke a condition or exception to its undertaking, it must consult the Panel first and obtain consent. It must then publicly disclose its reasons for relying on the condition or exception. A party may not engineer circumstances that allow it to invoke a condition in order to 'get out' of its undertaking.
These measures are designed to bring potential breaches of an undertaking to the Panel’s attention at an early stage so that it can take positive action.
We anticipate that the focus of the new regime will be on statements made by a bidder to induce a target company’s board into recommending an offer.
However, it is worth noting that the new regime extends to all ‘parties to an offer’. It therefore also covers statements made by a target company in its defence of a takeover offer. A target company is also bound to follow through any post-offer undertaking it makes in relation to an offer.
The Panel has clarified that a party's professional advisers will not be expected to monitor compliance with post-offer undertakings.
The new rules do not apply to public commitments made directly to identified persons or organisations. These will continue to be dealt with and enforced by those persons under existing contractual and regulatory frameworks. The Panel gives the examples of undertakings given to the CMA (which the CMA itself will enforce) and contractual undertakings given directly to individual directors, employees, pension scheme trustees and creditors.
At first glance, the new regime looks favourable for bidders. A bidder might be tempted to shy away from making post-offer undertakings and instead include several intention statements in full knowledge that it can walk away from those statements if it wishes.
However, we anticipate the new regime will favour target companies. Given the contentious nature of a hostile takeover and the associated problems with obtaining information and soliciting acceptances, a well-advised bidder will generally look to secure a recommendation for its offer from the target’s board.
Target boards are therefore likely to use the new regime to demand solid post-offer undertakings in exchange for a recommendation. Given the importance of the recommendation, a bidder may find itself shoe-horned into giving binding undertakings where it might otherwise prefer to make intention statements. A bidder in an auction scenario may be inclined to put forward post-offer undertakings to make its offer more attractive than competing bids.
When making a commitment, a bidder must consider carefully whether to draft it as an intention statement or a post-offer undertaking. It may well be that a decision to frame a commitment (particularly one with commercial significance) as an intention statement, rather than a post-offer undertaking, will be viewed with scepticism by target shareholders, damaging their confidence in the bid or prompting them to hold out to see whether the statement will be “upgraded” to a binding undertaking. This will be particularly relevant to share exchange offers, where shareholders will be relying on the post-offer undertaking.
The Panel has clarified that a post-offer undertaking made by a target company will not be binding on a bidder if the bidder ultimately acquires the target. The regime cannot, therefore, be used by a target company as a defensive tool on a hostile takeover. (This is not surprising, as this would almost certainly constitute "frustrating action", which is prohibited by the Code.)
Orrick’s corporate specialists will be pleased to advise you on all legal aspects of planning your takeover, including assessing defence tactics and liaising with the Panel in connection with specific proposals following the takeover.