- Following the Kraft/Cadbury takeover in 2010, UK Takeover Code (Code) was amended to hold parties to any statements of intention they made for 12 months.
- Pfizer’s possible offer for AstraZeneca earlier this year sparked fierce public debate regarding statements of intention made as part of an offer.
- In response, the UK Code Committee of the Takeover Panel (Committee) has proposed a series of amendments to the Code relating to post offer statements. Under the proposals, parties to an offer will be able to choose between making a 'post-offer undertaking', which will be binding, or a 'post-offer intention statement', which will not
History – in defence of chocolate factories
Prior to 2010, bidders in UK takeovers were required to include certain information in their offer document, for example regarding target employees. Bidders were free to, and often did, make statements regarding their wider intentions, in some cases to persuade shareholders or other stakeholders or to influence public debate, but this practice came under close scrutiny following Kraft Food Group Inc's (Kraft) controversial £11.5bn takeover of Cadbury plc (Cadbury) in 2010. The takeover received significant public attention, much of which focused on the impact on UK jobs and the loss of a much-loved UK brand (and what was seen – rather parochially and not very accurately – as a "British company") to a foreign acquirer.
In response to public concern, Kraft stated publicly that it intended to keep Cadbury's Somerdale factory open (which Cadbury had said it planned to close). However, following the offer and on the basis of further information, Kraft decided to close the factory, resulting in 500 job losses. This ignited a fierce public debate, with the UK parliament, press and public calling for changes to the Code to ensure that, amongst other things, bidders would be held to statements they make as part of an offer.
The motivation for changing the Code was not just related to the loss of jobs (and chocolates). It has always been the case that the UK Takeovers Panel (Panel) demands accuracy of statements made in the course of a takeover offer as shareholders should be entitled to rely on those public statements. However, the Kraft/Cadbury takeover focussed the Panel's attention on ensuring that parties to an offer say what they mean and do what they say – that bidders should not be able to make a statement as part of an offer then post-bid claim that, although they genuinely held the intention at the time they made the statement, they had subsequently changed their mind.
Kraft/Cadbury – awakening the Panel
The Kraft/Cadbury bid led to a number of wide ranging reforms to the Code. One such change required that, if a bidder made any statement of intention as to the future of the target business, the bidder would be held to that statement for a period of 12 months after the expiry of the offer period. However, at the same time, the Code separately required bidders to include in their offer documents details about its intentions with regard to the business, employees and pension schemes of the target.
The combination of these rules often created a difficult situation for bidders, as bidders were forced to make statements about certain matters and then were bound to comply with those statements. Unsurprisingly, to navigate these competing demands, bidders' statements frequently ended up being anodyne and heavily qualified, thus undermining the purpose of the Panel's reforms.
Pfizer – how binding commitments changed the landscape
These difficulties were brought into sharp focus by Pfizer Inc.'s (Pfizer) ultimately failed £69.4bn possible offer for AstraZeneca plc (AstraZeneca) earlier this year. AstraZeneca is a UK/Swedish pharmaceutical business which invests heavily in research and development and employs a large number of people in the UK. Similar to the Kraft/Cadbury takeover, the deal sparked a frenzy of interest from the UK public, parliament and media, all of whom were very keen to understand Pfizer's future intentions for the business (the Chairman of Pfizer was called before a parliamentary committee to explain Pfizer's plans for AstraZeneca, even before Pfizer had formally launched a bid).
On 2 May 2014, the day before the Chairman of Pfizer was due to address the parliamentary committee, Pfizer released a statement in which it voluntarily committed to an extraordinarily broad number of measures for at least five years, including:
- to develop a R&D hub in Cambridge,
- to maintain 20% of its R&D employees in the UK, and
- to retain substantial manufacturing facilities in the UK.
Pfizer's statement was unusual in that it expressed its statements as binding commitments rather than an intention. Even though the offer ultimately failed due to an inability to agree on price, it ignited a public debate on the effect of statements of intention and whether, as Pfizer had stated, they were in fact binding and could be enforced by the Panel.
Proposed reforms – commitments and intentions
Pfizer's statements acted as something of a wake-up call to the Panel about the power they possessed to enforce statements of intent, and sparked debate within the Panel as to how they might use that power. In particular, the Panel considered how it might enforce statements, whilst at the same time driving more meaningful disclosure about a bidder's intentions for the future. As a result, the Panel has proposed a new framework for statements of intention in an attempt to clarify when a party to an offer will be bound by the statements it makes. The Committee proposes to introduce two forms of post-offer statements:
- 'post-offer undertakings', which are binding on the party, and
- 'post-offer intention statements', which are not.
Commitments – 'post-offer undertakings'
These are commitments relating to the future conduct of the target business made by a party to an offer, which will have to be clearly stated and easily identifiable as such. The party providing the post-offer undertaking will be required to:
- comply with the terms of that undertaking for the period of time specified in the undertaking, and
- complete any course of action to which it commits, by the specified date.
A party may qualify an undertaking, but the qualification must be specific and precise. The Panel is not proposing to permit general qualifications relating to material adverse change, unspecified force majeure or directors' fiduciary duties. This aspect of the proposal is one that has caused takeover practitioners in the UK much concern, not least because it could lead to offer documents containing pages of carve outs, many of which would only be remote possibilities.
Post-offer undertakings will be treated, and strictly enforced, by the Panel as binding commitments. In support of its enforcement powers, the Panel may:
- require the party to provide written reports to confirm compliance with the undertaking, and
- appoint an independent supervisor to monitor compliance.
Intentions – 'post-offer intention statements'
These are statements of intention relating to the target business following the end of the offer period, but the party will not be obliged to fulfil the statement necessarily. The Committee considers that a post-offer intention statement should be both:
- an accurate statement of that party's intention at the time that it is made (a subjective test), and
- made on reasonable grounds (an objective test).
Whilst this will give rise to an expectation that the party will take that course of action, it will not be forced to. If the party does not comply with its statement and the Panel concludes that the party did not meet one of the tests described above when it made the statement, the Panel will have available to it its usual enforcement powers (for example, public or private criticism).
The road ahead – how commitments and statements will affect behaviour
As regards post-offer undertakings, parties who volunteer them will be bound by them, will have to report to the Panel and their conduct may be monitored, with any non-compliance severely penalised. So, why would anyone make such a commitment? Whilst we expect they will be fairly rare, commitments will carry extra weight and therefore will be a potent tool to convince shareholders and stakeholders of the merits of a deal, similar to the Pfizer bid.
Target boards may also seek to extract post-offer undertakings from a bidder as a condition for its recommendation, as UK directors are entitled to look at wider stakeholder interests in the context of an offer, not simply the offer price. However, if a target board seeks to extract a post-offer undertaking as a condition to its recommendation, it too would need to think very carefully about the consequences and the impact it might have on the offer terms.
As regards post-offer intention statements, the Panel anticipates that the changes will lead to more meaningful disclosure around intentions. While the reforms were prompted by the behaviour of bidders, they will apply to all parties to an offer, including target boards. So, if a target board makes a statement of its intentions for the target business after the expiry of the offer period (for example, in defence of a hostile bid, a statement to raise dividends) the same rules will apply. It is too early yet to tell, but it looks likely that the changes will pave the way for a more honest discussion around the future of target companies.
The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2020