Recent UK Takeover Rule Changes:  To Undertake or Intend — Mind the Difference!

January 21, 2015

THE BACKDROP

In May 2014, Pfizer Inc. made certain voluntary public statements in connection with its possible public takeover offer for AstraZeneca plc. These were made through the publication of a letter from Pfizer CEO, Ian Read, to the UK Prime Minister, David Cameron[1]. The letter referred to certain "commitments" that Pfizer were willing to make regarding the AstraZeneca business following a successful takeover offer, for a five-year minimum period. In particular, Pfizer committed to certain R&D projects in the UK, employment of a minimum of 20% of the combined group’s R&D workforce in the UK and retention of certain manufacturing facilities in the UK. Pfizer reserved the ability to "adjust [these] obligations should circumstances significantly change", consistent with [our] fiduciary obligations".

The statements, which were unusual[2] and unprecedented in a UK takeover context, were not made as a result of any specific requirements of the UK Code on Takeovers and Mergers (the "Code")[3] and gave rise to some confusion in the UK (amongst shareholders, politicians and the public generally). In particular, there was a lack of understanding about the impact of the "fiduciary out" qualifications and the enforceability of the statements in the event that Pfizer’s possible offer for AstraZeneca was consummated. Indeed, it was probably of some surprise to the UK Takeover Panel itself, when being asked to consider the theoretical question, it became apparent that on the face of the Code rules in force at the time, Pfizer would be held to the statements made in the event its offer for AstraZeneca was successful, unless there was a material change of circumstances. This was an undesirable outcome on a number of fronts (both in terms of the "harsh" impact of the statements made by the bidder at one level and the apparent ease with which the bidder could extricate itself from the fulfilling the statements).

As a result of the ensuring public debate (including pressure from elements within the UK’s coalition government), the Panel decided to review its rules and proposed certain changes[4] to the UK’s rules on takeovers. The changes to the Code introduce a new two-tier regime which creates a distinction between (firm) commitments and (softer) statements of intention. Depending on which category a statement falls within: (i) the framework and the substance and disclosure requirements; and (ii) the consequences of a failure to fulfil the stated undertaking or objective, will vary. 

When the proposed changes to the Code were first published in September 2014 and the apparent severity of the new restrictive regime applying to undertakings was reviewed by the UK public M&A advisory community, the initial reaction was that if the rules were to be promulgated, advisers would be firmly advising their clients to ensure that they did not voluntarily make an undertaking statement and therefore, the expectation was that the new restrictive rules would not be trialled in practice. Indeed, at the time the Panel published its consultation paper, it’s view was that undertakings of the type seen in Pfizer’s possible offer for AstraZeneca would not to be repeated or, if at all, they would be made very rarely and accordingly, the Panel would not have to test its powers of enforcement in relation thereto.

Since the publication of the proposed changes and deliberation about the proposed new regime, there have been a number of developments which place the new regime into a new light and enhances its practical importance. First, target boards and other parties have picked up upon the opportunity created by the introduction of the new regime — a new lever to pressurise bidders into making firm commitments. Secondly, in the wake of the UK election in May 201, there is scope for tactical heightened political sensitivity over overseas bidders looking to acquire UK listed companies and a corresponding increased pressure on such bidders to be forced down the route of making firm undertakings. Thirdly, following the consultation undertaken by the Code Committee of the UK Takeover Panel, clarifications made in its Response Statement,[5]  about the application of the new rules, it is not all ‘bad news’ for bidders — there are ways of alleviating the pressures of and restrictions imposed by the new regime, if a bidder chooses or is forced to go down the route of making a post offer undertaking.

TOP 15 FAQs

Set out below are the top FAQs and answers about the new regime which applies to bids for companies regulated by the UK Takeover Panel under the UK Code on Takeovers and Mergers.

Q1.    When does the new regime come into effect?

A:    The new rules came into effect on Monday, 12 January 2015. The new rules will not however apply to statements made by a party to an offer before 12 January 2015 (unless repeated after that date).

Q2.    What is a post-offer undertaking?

A:    A statement made by a party to an offer, relating to any particular course of action that it commits to take or not take, after the end of the offer period. The statement can be in written form — in any document or other information published by it; or it can be in any announcement, in each case relating to the offer.

On the one end, examples of post-offer undertakings may include a commitment or undertaking by a bidder to delist the shares of the target company after the end of the offer period. On the other end of the scale, it would capture a commitment of the kind made by Pfizer to retain certain number of jobs in the UK after the end of the offer period.

Q3.    What happens if a party accidentally makes a post offer statement of undertaking?

A:     Helpfully, it is not possible to inadvertently make a post-offer statement of undertaking. This is because a party can only make a post-offer statement of undertaking after having consulted with the Panel and any such statement must expressly state it is being made as a post-offer statement of undertaking.

Notwithstanding the above, it is recognised that parties may, through oral statements made in the course of an offer, give the impression to the market that they have committed themselves to certain courses of action. Parties should take particular care with such oral statements as the Panel may require them to issue a clarificatory statement elucidating the status of the statement made and effectively publicly withdrawing any alleged post-offer statement of undertaking. This remedial action required by the Panel can only serve to shine an unhelpful spotlight on the quality or weight of the statement made by the party and therefore care with oral communications from the outset is advisable.

Q4.    What are the key aspects of the substantive rules which apply to post-offer undertakings?

A:    Prior consultation with the Panel is mandated in all cases where a party intends to make a post-offer undertaking. The Panel will wish to ensure that when the statement it is made, it: (i) expressly states that it is a ‘post-offer undertaking"; (ii) a clear period of time for which the undertaking is made or date by which promised actions are to be taken, are specified; and (iii) any qualifications or conditions are prominently stated. There are limits on the types of conditions (or pre-conditions) and qualifications which can be made. In particular, it will not be permissible for a party to reserve an ability to get out of its commitment(s) in the event of a general "material change of circumstances"; for general consideration of director’s fiduciary duties; nor generic events of force majeure.

A party will however be able to introduce specific qualifications and conditions (or pre-conditions), provided they meet the standards of new Rule 19.7(c) being, that they are:

• specific and precise;
• readily understandable; and   
• not dependent on subjective judgements of the party to the offer or its directors.

Each time a party refers to the post-offer undertaking during the course of the bid, they will be required to refer to any qualifications or conditions to which the undertaking is subject. A party will not be permitted to rely upon a qualification or condition without first referring the matter to the Panel — the Panel is keen to stay on the pitch given the potential weight that undertakings can have in the context of a bid.[6]

Q5.    Are there any exceptions to the application of the rules on post-offer undertakings or situations where the regime described in 4. above would not apply?

Yes, there are. In order to avoid overlapping (and potentially conflicting jurisdictions), the Panel has carved out statements of commitment which have been given either directly to an identified person or group of persons AND which are capable of enforcement by that person or group of persons. The example quoted in both the consultation paper and the response paper by the Panel are commitments (for example, behavioural undertakings) given to the UK anti-trust authority, the Competition Commission or the European Commission. The Code Committee of the Panel has not provided an exhaustive list of when this exception may arise as it will wish to assess on the facts, if there is a third party who can effectively enforce such undertakings and the Panel will assess its own relative ability to enforce such undertakings alongside this.

The other exceptions are commitments or undertakings which are made privately to a party and statements made prior to the commencement of an offer period — these will not be caught UNLESS, in either case, they are published during the offer period.

Finally, the Code Committee has recognised that in exceptional cases (and only with its consent), there may be circumstances, where a party may commit to take (or not take) a certain course of action following the end of an offer period, other than by way of a post-offer undertaking (for example, by committing itself under a deed poll). If consent is granted, the party will be required to make it clear that the statement does not amount to a post-offer undertaking and that accordingly, the enforcement regime described in 10. below would not apply.

Q6.    Are target companies also subject to the new two tier regime?

A:    Yes, the new framework applies to post-offer undertakings made by both bidders and targets. A difference in treatment arises in respect of parties who subsequently come to acquire a bidder or target — see 7. below.

Q7.    Are third parties who subsequently acquire a bidder or target which has made a post-offer undertaking bound by such an undertaking?

A:     A post-offer undertaking made by a bidder would continue to bind that bidder in the event it were to be subsequently acquired by a third party. However, a post-offer undertaking made by a target company would not bind a bidder who subsequently acquired that target UNLESS that bidder had endorsed the post-offer undertaking as its own undertaking.

Q8.    What happens after a bid close and the offer period has ended in circumstances where a post-offer undertaking had been made during the offer period?

A:     There are two key continuing obligations which apply to the party who has made a post-offer undertaking: (i) reporting; and (ii) being subject to ongoing monitoring by a supervisor.

The party who has made the post-offer undertaking will be required to submit written reports (duly adopted by the board of directors or equivalent governing body) to the Panel at regular intervals as set by the Panel. The purpose of the report is to equip the Panel with information as to the party’s progress towards fulfilment of its undertaking or confirmation that the party has not taken any actions it committed not to take. The Panel may require all or parts of a report to be published via a Regulatory Information Service.

In addition, the Panel may require a party to appoint a supervisor to monitor compliance by the party with the undertaking and provide separate reports to the Panel on this.

Q9.    Can you explain more about the supervisor and its role?

A:     The concept of the supervisor is one which the Panel borrowed from the UK anti-trust regulator, the Competition and Markets Authority (CMA), who have the power to require the appointment of ‘monitoring trustees’ to monitor compliance of merger parties with interim and/or final undertakings agreed with the CMA.

Usually, the Panel would not require the appointment of a supervisor if it was satisfied that it will be able to monitor compliance with a post-offer undertaking itself, or with the assistance of an independent third party (not a supervisor).

The supervisor must be independent of the party concerned (or any of their concert parties) and must have the necessary skills to perform the role. The identity and the terms of appointment of the supervisor will have to be agreed by the Panel.  The party concerned will have to bear the costs of the supervisor[7] but the supervisor’s duties will be owed to the Panel (as will need to be set out in its terms of engagement) and the Panel will instruct them directly.

Q10.    What happens if a party is not able to fulfil its post-offer undertaking?

A:    Enforcement — Having made a voluntary commitment of this nature, it is incumbent on a party to fulfil its commitment. If the Panel is satisfied that there is a reasonable likelihood that a party would fail to act in accordance with its commitment, it can give a direction[8] to secure compliance. In addition, the Panel could apply to the court for an order[9] if there is a reasonable likelihood that a party will contravene a requirement under its rules or has already contravened such a requirement. The Panel is acutely aware that this is an area where pre-emptive action will be the most effective approach vis-à-vis enforcement — as seeking to unwind  actions which have already taken place can prove to be difficult, if not impossible, in practice.

Sanctions — In addition, a party needs to be aware that it will also be subject to the disciplinary powers and sanctions of the Panel for breach of the Code. These include the powers to: (i) privately censure; (ii) publicly censure; (iii) report an offender’s conduct to a domestic or overseas regulatory body; or (iv) "cold shoulder"[10] a person.

Advisers to parties who have made a post-offer undertaking need to take particular care to ensure that their clients have been made fully aware of their responsibilities under the Code. The Panel will, inter alia,  as part of any investigation into a breach of undertaking, wish to understand if advisers (in particular financial advisers to a party who has made such statements) have given proper guidance and advice to their clients on the requirements for and consequences of making the undertaking statement.

Q11.    What is a post-offer statement of intention?

A:     A statement made by a party to an offer, relating to any particular course of action that it intends to take or not take, after the end of the offer period. The statement can be in written form — in any document or other information published by it; or it can be in any announcement, in each case relating to the offer.

As noted above, the Code already requires bidders to make disclose their intentions regarding certain matters relating to the target company. These requirements were bolstered by changes to the Code introduced in 2011 and relate to operational, employment and trading matters pertaining to the target company.[11]

Parties are free to make statements of intention to which extend beyond the scope of the matters in Rule 24.2. In either case, these statements would be classified as post-offer statements of intention under the new regime.

Q12.    What are the key aspects of the substantive rules which apply to post-offer statements of intention?

A:     Any post-offer intention statement is required to be: (i) an accurate statement of that party’s intention at the time it is made (the "subjective test"); and (ii) made on reasonable grounds (the "objective test"). Parties and their advisers should ensure that there is proper diligence/verification and supporting documentation in place, at the time the statements were made, to demonstrate due consideration and compliance with the subjective and objective tests.[12]

Q13.    Are there requirements to provide specific undertakings or make statements of intentions under the Code?

A:     The Code does not mandate parties to an offer to make specific undertakings or commitments.

However, there are already requirements set out in Rule 24.2 of the Code which obliges offerors to disclose their intentions vis-à-vis certain matters relating to the target and its business. Rule 24.2 of the Code requires bidders to disclose their intentions with respect to: (i) the future business of the target; (ii) continued employment of management and employees; (iii) employer contributions to target pension schemes and accrual of benefits; (iv) redeployment of fixed assets of the target; and (v) maintenance of trading facilities for any relevant securities of the target.

Q14.    What happens if a party is not able to fulfil its post-offer statement of intention?

A:    If in the 12-month period from the date the offer period ended or such other period as specified in the intention statement[13], the party decided to take a different course or not to take the course it stated it would take, it must consult with the Panel. The Panel’s consent is not required to a different course of action being taken (because that in itself will not be a breach of the Code); however the Panel will want to be consulted and may decide to investigate if a breach of the Code had occurred at the time the post-offer intention statement was made. In particular, a breach will arise if the subjective and objective tests were not fulfilled.

If the Panel determines that a breach had occurred, it would then need to consider whether to commence disciplinary proceedings and to impose one or more sanctions[14]. Bidders and targets should also be aware that if the post-offer intention statement relates to matters which are required to be disclosed under any of the "offer document rules"[15] or "response document rules" (together the "bid documentation rules") their actions may also amount to a criminal offence. The latter will be relevant if the offer document (of a bidder) or response document (of a target) did not comply with the substantive bid documentation rules, or if a party was reckless to whether it complied, or, it failed to take reasonable steps to ensure that it did so comply.

Q15.    What is the best advice you can give to a person contemplating making certain statements of commitment in the context of UK public takeover offer?

A:    Early consultation with advisers is critical in order to understand how to navigate the new regime. In particular, parties to an offer need to understand the new dynamic, leverage and opportunities it may give rise to (as some parties may now seek to extract undertakings and not "mere" statements of intention from bidders); to understand the implications of making certain statements, in particular post-offer undertakings and if a party decides (or agrees) to make a post-offer undertaking, ensuring that appropriate qualifications or conditions are included and consented to by the Panel.

As noted in the FAQs above, there are a number of matters which require prior consent and/or consultation with the Panel and this is an area where advice from UK public M&A practitioners will be key.

OTHER RECENT CHANGES TO THE CODE & UK TAKEOVER GUIDANCE

 There have been other changes recently introduced to the Code. A number of changes to, inter alia, the rules regarding: (i) competitive bids; (ii) parties being held to statements made during offer periods (whether ‘no increase’ or ‘no extension’ statements)[16]; and helpful guidance[17] on what a possible bidder can do when it is meant to have "downed tools" following a "shut up" statement, in particular, its ability to make a single confidential approach to the board of the target company during the restricted period of six months and 12 months under Rules 2.8 and 35.1 respectively.

   [1]   Pfizer Press Release, available here.  

   [2]   They were expressed as commitments rather than statements of intention . Further, they were fairly long-term in nature — most statements of intention to date being expressed to apply for no more than 12 months.

   [3]   The UK Takeover Code (which is administered by the UK Panel on Takeovers and Mergers (the "Panel")) requires bidders to disclose their intentions with respect to certain matters which are summarised in Q13 below.

   [4]   Panel Consultation Paper PCP 2014/2 "Post-Offer Undertakings and Intention Statements" — http://www.thetakeoverpanel.org.uk/consultation/previous-consultation-papers.

   [5]   See the Panel’s Response Statement RS 2014/2 — Post-offer Undertakings and Intention Statements: Response Statement by the Code Committee of the Panel Following the Consultation on PCP 2014/2 — http://www.thetakeoverpanel.org.uk/consultation/response-statements.

   [6]   See new Rule 19.7 on "Post-offer Undertakings".

   [7]   The Panel has clarified that the fees and expenses to be paid to the supervisor will not have to be publicly disclosed.

   [8]   See section 10(b) of the Introduction to the Code.

   [9]   See section 10(d) of the Introduction to the Code — applications to the court under section 955 Companies Act 2006.

  [10]   This involves publishing a statement that the offender is someone who in the Panel’s opinion is not likely to comply with the Code. All persons who are authorised by the UK Financial Conduct Authority must not act for any persons who are subject to such a statement, in connection with any Code transaction for as long as specified in the relevant statement.

  [11]   See footnote 3 above and Q13 for a summary of the relevant requirements.

  [12]   See new Rule 19.8 on Post-offer Intention Statements.

  [13]   Note: Unlike post-offer undertaking statements, there is no requirement to specify a relevant period of application. In the absence of a specified time frame, the Panel will look to hold that party to its intention statement for a 12 month period.

  [14]   See Q10 above for a summary of what these comprise.

  [15]   These include the statements of intention required under Rule 24.2 as summarised in Q13 above.

  [16]   These changes came into effect on 1 January 2015 — See PCP 2014/1 (http://www.thetakeoverpanel.org.uk/consultation/previous-consultation-papers and RS 2014/1 (http://http://www.thetakeoverpanel.org.uk/consultation/response-statements).

  [17]   See Practice Statement No. 28 — "Rules 2.8 and 35.1 — Entering into talks during a restricted period", published on 14 November 2014 (http://www.thetakeoverpanel.org.uk/statements/practice-statements).