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Developments in public M&A

Developments in public M&A
  • United Kingdom
  • Capital market law


Takeover Panel Public Consultation Paper (PCP) 2017/2: Statements of intention and related matters


1. Introduction

On 19 September 2017, the Code Committee (the “Code Committee”) of the UK Takeover Panel (the “Panel”) published “Public Consultation Paper 2017/2: Statements of Intention and Related Matters”. The consultation period ends on 31 October 2017. This client briefing provides a brief overview of the changes proposed, the background to, and the Panel’s rationale for, them and their potential implications.

2. Overview of the proposed changes

The changes to the City Code on Takeovers and Mergers (the “Code”) that the Code Committee is proposing are set out below:

  • In addition to the current requirements for an offeror to make statements of intention with regard to the business, employees and pension schemes of the offeree company, an offeror should be required to make specific statements of intention with regard to the offeree’s research and development functions, the balance of the skills and functions of the offeree’s employees and management and the location of the offeree’s headquarters and headquarters functions.
  • Statements of intention (including the additional ones proposed above) should be made earlier in the offer process, i.e. at the time of the firm intention to make an offer announcement (the “Rule 2.7 announcement”).
  • An offeror must not publish an offer document for 14 days from its Rule 2.7 announcement without the consent of the board of the offeree.
  • Offerors and offerees must publish reports on post-offer undertakings and post-offer intention statements given during the course of an offer.

3. Statements of intention

Currently, Rule 24.2 of the Code requires offerors to set out in the offer document (or scheme document) the long-term commercial justification for the offer and their: (i) intentions with regard to the future business of the offeree (Rule 24.2(a)(i)); (ii) intentions with regard to the continued employment of the offeree’s employees and management (Rule 24.2(a)(ii)); (iii) strategic plans for the offeree (and their likely repercussions on employment and the locations of the offeree’s places of business) (Rule 24.2(a)(iii)); (iv) intentions with regard to employer contributions to the offeree’s pensions scheme(s) (including in respect of any current arrangements to fund any deficit in a defined benefit scheme), the accrual of benefits for existing members and the admission of new members (Rule 24.2(a)(iv)); (v) intentions with regard to any redeployment of the offeree’s fixed assets (Rule 24.2(a)(v)); and (vi) intentions with regard to the maintenance of any existing trading facilities in relation to offeree securities (Rule 24.2(a)(vi)).

The obligation on an offeror to state its intentions with respect to the offeree’s business, employees and pensions scheme(s) is a longstanding one and was last significantly refreshed in 2011 with the aim of improving the quality of such disclosure following the takeover of Cadbury plc by Kraft Foods Inc. in light of certain issues which arose from that bid relating to statements made by the offeror during the offer process with respect to its intentions in relation to certain aspects of the target’s business and operations which were not kept to subsequently.

However, whilst the Panel has noted that the quality and detail of disclosures in offer documents relating to offerors’ intentions with respect to offerees’ businesses, employees and pensions scheme(s) has generally improved since the 2011 rule changes, it still contends that a number of disclosures are not as specific and detailed as they could be, particularly in the context of recommended deals where there is co-operation between the offeror and offeree and, in many cases, significant due diligence access granted to an offeror, such that it should have more information to be able to formulate plans and strategies with respect to a target’s business, employees and operations post-completion and set these out in the public offer documentation.

In particular, the Panel appears to be particularly concerned by offerors seeking to satisfy the requirements of Rule 24.2 by stating that their intention is to undertake a review of the offeree company’s business following completion of the takeover, thereby avoiding having to say anything substantive about their plans at the time of the offer. The introduction at the end of 2016 of a requirement on offerors to send the Panel checklists demonstrating how they have complied with the contents requirements set out in the Code for Rule 2.7 announcements and offer documents (including an intention statement schedule which requires an offeror to set out how it has satisfied the specific disclosure requirements of Rule 24.2(a)) seems to have done little to meet the Panel’s concerns.

As a result, the Panel intends to amend Rule 24.2(a) to require offerors to state their intentions with respect to the offeree’s research and development functions, the balance of the skills and functions of the offeree’s employees and management and the location of the offeree’s headquarters and headquarters functions in an effort to draw out more detailed disclosure from offerors than it currently considers they are making.

4. When statements of intention have to be made

The perceived lack of sufficient detail in offeror disclosures currently, combined with the fact that such statements are only required to be made at the time at which the offer document is published (under Rule 24.2), which, on a recommended deal, will include the target’s board’s views rather than those being published in a separate circular, in the Panel’s view, also puts the boards of targets, as well as employee unions and pension scheme trustees, at a disadvantage as they are not being presented with sufficient information about offerors’ plans and intentions with respect to the target’s business and its workforce etc. early enough in the takeover timetable, or at all, to be able to provide a meaningful view, as the target board is required to do under Rule 25.2 and employee representatives and pension scheme trustees are entitled to do under Rule 25.9, on the merits of an offer to target shareholders, employees and other interested stakeholders.

Moreover, offerors will, for tactical reasons (e.g. to reduce the time for potential competing offerors to prepare offers or, in the case of “hostile” bids, to put more pressure on the target board), frequently publish their offer documents relatively soon after having released their Rule 2.7 announcements, which, in practice, always means that employee representatives and pension scheme trustees do not have sufficient time to consider the disclosures around intentions for the target’s business and employees etc. and to produce an opinion in time for inclusion in the offer document, meaning that it is published afterwards on the target’s website, potentially reducing its impact.

The Panel’s proposal to address these issues is two-fold:

  • it intends to require the statements of intention (including the additional ones proposed above) currently required by Rule 24.2 only to be included in an offer document also to be included in the Rule 2.7 announcement (in practice, this is not a particularly radical change in that the vast majority of Rule 2.7 announcements issued in recommended bids already tend to contain those statements in any event, which are then simply repeated in the offer document); and
  • to amend Rule 24.1(a) so as to provide that offerors must not publish an offer document for 14 days from the date of their Rule 2.7 announcement without the consent of the board of the offeree company (which, on hostile offers, would effectively give the board at least 28 days from the date of the Rule 2.7 announcement, thereby giving them more time to consider their counter-arguments and to prepare the defence circular). This would also:
    • give target boards certainty that, on hostile bids, the restriction in Rule 5.1 on offerors and their concert parties acquiring (other than from a single shareholder as per Rule 5.2(a)) interests in shares in the target carrying 30 per cent. or more of the voting rights would continue to apply for a minimum of 35 days from the date of the Rule 2.7 announcement (i.e. the 14 days during which the offer document could not be published and the minimum of 21 days stipulated in Rule 31.1 until the first closing date (as per Rule 5.2(c)(iii)); and
    • increase the minimum time available for the target board to prepare its final response to the offer for inclusion in the “Day 39” circular, as contemplated by Rule 31.9.

5. Reports on post-offer undertakings and post-offer intention statements and their publication

The final changes proposed by the Panel in the consultation paper relate to reporting on post-offer undertakings (i.e. statements relating to a particular course of action that an offeror or offeree commits to take, or not take, after the end of an offer period and with which it is required to comply for the period of time specified in the undertaking, unless a qualification or condition set out in the undertaking applies) and post-offer intention statements (i.e. statements relating to a particular course of action that an offeror or offeree intends to take, or not take, after the end of an offer period, which are required to be accurate statements of the party’s intentions at the time they are made and based on reasonable grounds) made during the course of an offer.

Currently under Rule 19.5(h)(iv), offerors or offerees that have made post-offer undertakings are required to submit written reports to the Panel after the end of the offer period at such intervals and in such form as the Panel requires and the Panel may require them to be published via an announcement through a Regulatory Information Service (under Rule 30.1). The Panel intends that Rule 19.5)h)(iv) be amended so that, instead of the requirement to publish the reports being at the Panel’s discretion, it applies in all cases and that where the post-offer undertaking has a duration of longer than a year, such reports should be published at least annually.

In addition, the Panel wants to introduce a new Rule 19.6(c) that requires an offeror or offeree that has made a post-offer intention statement to be required at the end of period of 12 months from the date on which the offer period ends (or such other period of time that was specified in the statement) to: (i) confirm in writing to the Panel whether it has taken, or not taken, the course of action described in the post-offer intention statement; and (ii) announce that confirmation via a Regulatory Information Service.

The Panel’s rationale for proposing the above changes to the Code is to ensure that parties involved in an offer are held to greater public account in connection with the making of such statements and act with more circumspection and give greater consideration to the consequences than perhaps is currently the case prior to making them.

6. Eversheds Sutherland view

In recent years, particularly since the Brexit vote and the subsequent devaluation of sterling against the dollar, euro and other currencies, there have been a number of high profile instances of overseas companies making offers for, or acquiring, well-known UK companies, such as SoftBank’s takeover of ARM Holdings, Teledyne Technologies’ acquisition of e2v technologies and Kraft’s attempted takeover of Unilever, all of which attracted significant media and public comment in relation to UK research and development and technology expertise succumbing to foreign ownership, as well as raising concerns around national security in some cases. Prior to these, there was also the high profile bid by Pfizer for AstraZeneca, which ended with Pfizer withdrawing but not before the deal had attracted significant adverse media attention which led to it making a number of commitments around the way in which it would operate AstraZeneca’s business for a minimum of five years.

The changes proposed in the Panel’s consultation paper, which have clearly been designed to address the above concerns, have been welcomed by the UK Government (which made suggestions to the Panel during the development of the proposals) and are aligned with the Conservatives’ election manifesto promises that deals driven by “aggressive asset-stripping or tax avoidance” would no longer be welcome, that bidders would have to be clear about their intentions and that their promises would have to be legally binding. However, the proposals clearly do not amount to the introduction into the Code of a “public interest” test in relation to takeovers by overseas companies that some have been calling for and which should be matters for government policy rather than for the Panel.

On recommended deals, most bidders already include disclosure around their intentions for the target business and its employees at the Rule 2.7 announcement stage and target boards would likely acquiesce to offer documents being published within 14 days of the Rule 2.7 announcement so, whilst the enhanced disclosure requirements may have an effect on more controversial, but nevertheless recommended, transactions, the overall impact of the rule changes on recommended transactions may be limited.

It is also likely that the impact of the rule changes may be limited in relation to hostile offers as well, given that bidders will be unlikely to have any information about the target with which to formulate plans that is not in the public domain and so may simply not be able to comply with the requirements in any meaningful way. It is also worth noting that, in those cases, the stated argument in support of providing offeree boards and employee representatives longer to consider and respond to an offeror’s plans would appear less sound. Whilst the consultation paper sets out the arguments for improved disclosure, there appears little real debate over the merits of making what amounts to a potentially significant change to the Code timetable. The Code Committee considers it “might be desirable” for an offeree board to have longer to formulate its opinion, reasons and views under Rule 25.2(a) but, more fundamentally, this will also give the offeree board longer to prepare its defence to a hostile offer. There are obviously arguments for and against such a change which are deserving of a fuller debate.

Some might argue that the proposed rule changes could, in fact, deter potential bidders from making offers for UK companies for fear of having to disclose too much at too early a stage about their plans, producing the unintended consequence of preventing positive outcomes for those companies under new ownership, particularly in rescue or distressed situations.

Whilst the changes proposed in the consultation do not, of themselves, amount to the introduction of a “public interest” test in relation to takeovers, it is worth noting that they are clearly part of a wider Government desire to have greater powers to examine and potentially intervene in M&A activity that has a potential “public interest” or “national security” angle.

On 17 October 2017, the Department for Business, Energy & Industrial Strategy (the “DBEIS”) published a green paper entitled “National security and infrastructure review” launching a consultation in response to the Government’s review of the Enterprise Act 2002 and its powers in relation to foreign investment and national security. The measures being proposed are designed to enable the Government (through the Competition and Markets Authority (“CMA”)) to examine and potentially intervene in M&A activity involving UK companies (both public and private), including smaller businesses, that raise national security concerns and are targeted at key areas, specifically, companies that design or manufacture military and dual use products and parts of the advanced technology sector.

In relation to these areas, in the short term, the Government is proposing to lower the turnover threshold within the Enterprise Act 2002 from £70 million to £1 million and to remove the current requirement in the Enterprise Act 2002 for a merger to increase the share of supply to, or over, 25 per cent. These changes, if implemented, will bring a much wider range of M&A transactions within the CMA voluntary notification regime than is currently the case.

The green paper also sets out the Government’s desire, over the longer term, to follow the examples of other developed countries and to make more substantive changes to how it scrutinises the national security implications of foreign investment with potential reforms including: (i) an expanded version of its “call-in” power to allow the Government to scrutinise a broader range of transactions for national security concerns within a voluntary notification regime; and/or (ii) the introduction of a mandatory notification regime for foreign investment into the provision of a focused set of “essential functions” in key parts of the economy.

Clearly this is a very sensitive area for Government policy makers, particularly in the current political and economic climate, and so the outcome of the Code Committee consultation and the final rule changes to be implemented will be closely watched and it will be interesting to see how the changes are tested in the next high profile transaction after they come into effect, particularly in the wider context of the competition regime reforms also proposed in the DBEIS green paper.

7. Further reading

Further useful information can be accessed from the links below:

PCP 2017/2, 19 September 2017:  

The Takeover Code:

National Security and Infrastructure Review – The Government’s review of the national security implications of foreign ownership or control, October 2017:  

8. Eversheds Sutherland’s recent takeover experience

  • Advising Teledyne Technologies Inc. (and its subsidiary, Rhombi Holdings Limited) on the £616 million takeover of e2v technologies plc
  • Acting for Daisy intermediate Holdings Limited on its £165.3 million takeover of Alternative Networks plc
  • Acting for Altrad Investment Authority SAS on its £332.3 million recommended cash offer for Cape plc