By Stephen Walters, partner in the London Business & Finance practice of global law firm, Morgan Lewis
The fourth quarter of 2014 saw the announcement of a number of PE sponsor backed Public to Private transactions, a reminder that the public equity markets remain fertile territory for sponsors seeking deals.
Managers with an appetite for this type of deal, particularly in R&D heavy sectors such as Life Sciences, will want to take note of amendments to the UK Takeover Code (the “Code”) which the UK Takeover Panel published just before Christmas, that introduce extensive changes to the Code rules with regard to the making by offerors (and in principle, although more rarely in practice, offerees) of voluntary post offer public statements with respect to actions they intend or commit to take, or not take, after the end of the offer period. The amendments came into effect on 12 January 2015.
Voluntary statements of the kind which the amended rules regulate have been made in several well publicised cases in recent years. Typically, such statements are made with a view to securing offeree board approval of the offer, which in turn, may to some extent be contingent upon securing support for the offer (or avoiding opposition to it) from other stakeholders (employee representatives and trade unions, Government departments, NGOs, the media….).
Examples of the kind of statement which will be subject to the new rules are: a commitment to keep a factory open, to maintain research facilities, to complete a capital investment project, to maintain a certain level of employment within the offeree company, or to maintain a listing.
The new framework
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The most significant amendments to the Code are to be found in new Rules numbered 19.7 and 19.8. They introduce two distinct types of post offer voluntary public statement, each of which is regulated differently:
- Rule 19.7 regulates “post offer undertakings”. These are statements as to actions which the party who makes them commits to take or not take. They are required to be labelled as such, and may only be made after prior consultation with the Panel. The party making the undertaking is required to comply with it for the period of time specified in it, unless any qualifications or conditions to which it is clearly stated to be subject, apply.
The rule states that the undertaking must be specific and precise, readily understandable and capable of objective assessment, and not depend upon subjective judgments of the party giving it or its board. Moreover, to reinforce the certainty of the undertaking, Rule 19.7 provides that if the party making it wishes to rely on a qualification to or condition of its performance, it must first consult with the Panel.
- Rule 19.8 introduces the notion of “post offer intention statements”, defined as statements regarding post offer period courses of action which the party making them intends to take or not take. Such statements, which do not require prior consultation with the Panel, have to be an accurate statement of the party’s intention at the time they are made, and be made on reasonable grounds.
The features of the new framework which are perhaps most noteworthy are the post offer period requirements with respect to post offer undertakings. Rule 19.7 establishes a requirement for regular compliance reporting to the Panel by the party giving the undertaking post offer period and if required, for the duration of the undertaking. It also allows the Panel to insist upon the appointment by the party which has given the undertaking of a “supervisor”, to monitor compliance with it and submit written reports in accordance with arrangements made between the Panel and the supervisor.
Objectives and impact of the reform
The Panel’s stated objectives in introducing this new regime for post offer voluntary public statements were to provide clarity as to the status of such statements, increase the effectiveness of the enforcement tools available and enable parties to an offer to make “informative statements of intention”.
The first of these objectives has clearly been achieved by the changes to the Code which have been adopted.
With regard to the second objective, what the Panel has done is to introduce additional tools to help it monitor compliance with post offer undertakings. In doing so, it will no doubt be careful in practice to avoid being drawn outside its customary field of action, particularly if the undertakings are of a complex industrial nature, have a long term horizon, or concern actions by non-UK bidders which are required to be taken or not taken outside the UK.
Regarding the third objective, organisations of the kind which might hope to benefit directly or indirectly from post offer undertakings are hoping not only that such statements are “informative”, but that they are binding and that bidders will be encouraged to make them. Particularly in contested or competitive situations, where information and cooperation from the offeree are absent, bidders may be inclined to go no further than post offer intention statements under the new rules.
For their part, offeree boards and their advisors may, when the opportunity arises, flex the additional muscle which the new framework for voluntary post offer public statements provides, by encouraging offerors to formulate post offer statements of the kind targeted by the reform as post offer undertakings, with the additional constraints which that choice now entails.