The Politics of Post-offer Undertakings in Takeovers

On 12 January 2015, following perceived concerns raised during Pfizer’s approach for AstraZeneca, important changes regarding statements relating to bidders’ post-offer intentions for the target were introduced to the Takeover Code (the “Code”).  These are, however, only the latest in a number of changes to the Code, following high profile and politically emotive approaches for some of Britain’s most loved companies.
  
Mapping the History of Post-offer Undertakings
 
The Kraft/Cadbury Takeover
 
Statements of intention made headlines in 2010 following Kraft’s ultimately successful takeover of Cadbury, one of the UK’s most prominent businesses.  During the offer period, Kraft stated that it believed it would be able to reverse the planned phased closure of Cadbury’s Somerdale facility and transfer of operations to Poland.  However, once the offer had become unconditional, Kraft announced that Cadbury’s plans to close the Somerdale facility were so far advanced that it was unrealistic to reverse them.
 
Following public criticism of Kraft from the Takeover Panel (the “Panel”) for failing to meet the standard that all statements made and information given during the course of an offer had to be adequately and fairly presented, the Code was revised.  This gave the Panel more teeth in respect of bidders who, during the course of an offer, made statements about courses of action they intended to take, or not take, and then subsequently did not comply with those statements once the offer had been successful.  Following the change, if the bidder announced a statement relating to any particular course of action, the bidder was regarded as being committed to that course for at least 12 months following the acquisition unless a material change of circumstances occurred, as decided by the Panel.
 
Pfizer’s approach for AstraZeneca
 
During 2014, Pfizer’s potential bid for AstraZeneca provoked political concerns that the deal would result in UK research jobs and investment being lost, and prompted Pfizer to write to the Prime Minister with certain commitments.  The Code changes above clearly placed a binding obligation on Pfizer to comply with these commitments.
 
Although the deal fell through, it highlighted some weaknesses in the enforcement mechanisms available for breach of commitment introduced following the Kraft/Cadbury takeover.  Where breach of a commitment was threatened, the Panel could issue a direction and could also apply to the court for an injunction preventing any actions amounting to a breach from taking place.  However, this approach relied on the Panel receiving knowledge of the potential breach early.  If, however, steps in contravention of the commitment had already been taken by the time the Panel became aware of the breach, it could not order compensation for the breach of commitment that had already occurred, and a court could not render the action taken void, unenforceable or invalid.  This significantly weakened the Panel’s position to hold a bidder to account for any post-offer commitments.
 
12 January 2015 Code changes
 
Following the changes, the Code distinguishes post-offer undertakings from post-offer intention statements.  Now, where a post-offer intention statement relates to any course of action a bidder intends to take (or not take) after the end of the offer period, the bidder will be required to consult the Panel if, during a 12 month period from the date on which the offer period ends, it decides not to adhere to it.  The bidder must also promptly announce the course of action and explain its reasons. 
 
Where a bidder commits to any course of action after the end of the offer period, it must consult the Panel in advance and the post-offer undertaking must fulfil various criteria relating to timings, qualifications and conditions.  Its terms must be specific and precise, capable of objective assessment and not depend on subjective judgements.  The bidder is required to submit written reports to the Panel, and may also be required to appoint a supervisor to monitor compliance, and compliance will only be excused if a qualification or condition set out in the undertaking applies.
 
These changes aim to ensure that a bidder can be held to its statements by the Panel in a more effective and accountable way.  The new consultation provision for intention statements ensures that the Panel can proactively use its enforcement powers before any breach occurs, and the conditions allowing non-compliance with undertakings are much more transparent, as they must be set out in the original statement.
 
Questions for the future
 
Although the latest changes to the Code aim to minimise the widespread discussion surrounding perceived fallout from takeovers involving prominent UK companies, the new post-offer undertakings regime raises some important questions.  The main issue concerns whether a bidder will ever choose to make a post-offer undertaking when it can make statements of intention without submitting itself the same level of scrutiny by the Panel.  However, it is possible that post-offer undertakings may provide the Government with an additional quiver to its bow in the most high profile cases, by enabling the Government to place informal pressure on a bidder to provide post-offer undertakings to show that it is serious about its intentions towards the target.
 
Whether the UK’s current position regarding takeovers will be maintained depends on the May 2015 election result.  A future Labour government has pledged in its manifesto to tighten the rules relating to takeovers, and introduce a public interest test to review and block deals as necessary.  However, if the UK does leave the EU following the referendum promised by the Conservatives, the current EU constraints protecting the common market may no longer directly apply.  Therefore, future governments may be able to take an interventionist approach on an ad hoc basis, to protect targets where it feels political intervention is required. 
 
Nigel Boardman is a Partner who’s broad practice includes domestic and international corporate finance, mergers and acquisitions, joint ventures, IPOs, demergers, private acquisitions and disposals, private equity, public takeovers, issues of compliance and corporate governance, investigations and insolvency, restructurings, investigations and sports law.
 
T +44 (0)20 7090 3418
E nigel.boardman@slaughterandmay.com
 
Rose Bailey is an associate in the corporate group, who advises on a wide range of matters. She holds a law degree from the London School of Economics and Political Science.
 
T +44 (0)20 7090 3668
E rose.bailey@slaughterandmay.com