Say what you mean (and do what you say) – Takeover Panel reminds offerors to be clear on their plans for targets following completion

Code requirements for statements of intention

The Takeover Code requires offerors to state their intentions regarding specific aspects of the target's business clearly in the offer documentation. The rationale for this is threefold: (i) it helps the target board to better understand what is proposed for the business going forward and assists it with providing its opinion and recommendation on the terms of, and effect of, the offer; (ii) it helps target shareholders reach an informed decision as to the merits (or demerits) of the offer; and (iii) where relevant, it helps to inform the views of employee representatives and pension trustees on the offer for the purposes of their opinions on the same.

Pursuant to Rule 2.7(c)(viii) and Rule 24.2(a) of the Takeover Code, an offeror is required to set out in the Rule 2.7 announcement and bid document (whether that is an offer document or scheme document), respectively, its statements of intention regarding the business, employees and pension(s) of the target. Note 1(a) on Rule 2.7 and Rule 24.2(a) prescribe the specific areas in respect of which an offeror must state its intentions, namely:

• the target’s future business, and any research and development functions;
• the continued employment of target group employees and management, and material changes in employment conditions or in the balance of skills and functions;
• strategic plans for the target and their likely repercussions on employment and business locations (including the target’s headquarters and headquarters functions);
• employer contributions to the target’s pension scheme(s), funding arrangements for any scheme deficits), accrual of benefits for existing members and admission of new members;
• any redeployment of the target’s fixed assets; and
• maintenance of any existing trading facilities for the target’s securities.

If an offeror has no intention to make changes in relation to these specific elements of the target's business then it must make an appropriate negative statement to that effect.

The Takeover Panel strongly encourages consultation with the Executive on the proposed form of the intention statements prior to the release of the Rule 2.7 announcement (being the first document in which the offeror's intentions are made public) – and we certainly see this built into takeover timetables in practice. Of particular concern to the Executive is ensuring that the intentions are complete and meaningful such that they achieve their purpose.

What is the Executive seeing which has led to the publication of Panel Bulletin 7?

In the Panel Bulletin, the Executive refers to several arguments it hears from offerors as to why specific statements of intention cannot be made. These include:

• ·no intentions can be stated because the offeror does not yet have full visibility on the synergies expected to arise from the offer (for example in relation to the skills and functions of the employees);
• the intentions are considered by the offeror to be immaterial (for example in relation to proposed headcount reduction) and so do not need to be stated;
• at that stage the offeror's only intention is to conduct a strategic review of all aspects of the target's business post-completion once it has full access to the business and so its intentions can only be formulated following that review; or
• there is no need to be any more specific because the proposed post-offer intention statements surely must satisfy the requirements of the Takeover Code as they are in the same form as statements previously made by offerors on historic takeovers.

Say what you mean!

The Executive's view on these arguments is clear – none of them are an acceptable basis on which to formulate statements of intention.

In the Panel Bulletin the Executive refers to Response Statement 2017/2 (Statements of intention and related matters) in which the Code Committee noted that in seeking to acquire a target in the first place offerors will already have a business rationale for making the offer and an idea about what it wants (or does not want) to do following completion of the offer. On that basis, it is the Executive's expectation that offerors should, more often than not, be in a position to set out their specific, bespoke statements of intention in accordance with the requirements of the Takeover Code. In fact, the Executive considers that an offeror will only exceptionally ever truly be in a position to make a negative statement with regards its intentions for the target.

The Executive also specifically agreed with the statement in Response Statement 2017/2 that whilst there may be circumstances where an offeror may wish to state its intention is simply to undertake a review of the target's business following completion of the offer, that statement does not in and of itself satisfy the requirements of the Takeover Code. The Executive is reminding offerors that in such circumstances an offeror should disclose what that review is likely to cover and set out its expectations in relation to the review.

And don't forget to do what you say

Whilst an intention statement must be an accurate reflection of the party's intention at the time it is made and must be made on reasonable grounds, there is no requirement to follow through with any stated intention. If within 12 months of the end of an offer period an offeror decides to take a different course of action it should consult the Executive. The Executive will be primarily concerned with whether the statement was an accurate reflection of the offeror's intentions at the time it was made and whether it has good reasons for the change in its approach. Following consultation, the Executive may require the offeror to make an announcement referring to the original intention statement, describing the alternative action the offeror has taken or not taken (or is taking or will no longer be taking), explaining the rationale for the change of intention.

Post-offer undertakings

Post-offer intention statements should not be confused with "post-offer undertakings" which relate to statements by a party to an offer regarding a particular course of action that it commits to take (or not take) after the end of the offer period.

There is no requirement to give post-offer undertakings under the Takeover Code and in the event such an undertaking is given it will be subjected to the prior scrutiny of, and regulated once made by, the Takeover Panel who impose potentially onerous obligations on the relevant party to satisfy the undertaking by the date specified.

The Executive will monitor compliance with the terms of any post-offer undertaking, requiring the relevant party to submit written reports to the Executive at specific intervals following the end of the offer period, giving details of whether the undertaking has been complied with. The Executive may also require the relevant party to appoint a supervisor to monitor compliance with the undertaking and for the supervisor to submit written reports to the Executive too. The purpose of these reports is to put the Executive on notice if it appears as though the party that gave the post-offer undertaking may not comply with its terms. This gives the Executive the opportunity to intervene if necessary, by directing the party to comply to ensure the undertaking is fulfilled or seeking a court order.

The Executive may exercise its disciplinary powers for a breach of the Takeover Code in respect of an unfulfilled post-off undertaking, which include private censure, public censure and 'cold shouldering' (involving publication of a statement that the offending party is someone who in the Panel’s opinion is not likely to comply with the Takeover Code – FCA authorised persons are not permitted to act for any persons who are the subject of such a statement in connection with any Takeover Code transaction for as long a period as is specified in the statement).

Key takeaways

We are seeing increased levels of UK public takeover activity and this serves as a timely reminder of the Executive's expectations regarding the importance of appropriate disclosures of information to target companies and their shareholders to enable them to reach properly informed decisions on the terms of an offer.

We share the Executive's view that offerors will have an idea of their intentions for the target's business at the outset of any offer, with those intentions often aligned with the commercial rationale for pursuing the target in the first place. The Panel Bulletin makes clear that precedents will only get you so far and should not be relied upon in substitution for providing the most accurate information available on the offeror's specific intentions for the target post-offer.

Offerors should remain mindful of their Takeover Code obligations in respect of these disclosures and going forward they should not expect the Takeover Panel nor a well-advised target board will be easily persuaded that the offeror may leave its plans deliberately vague until its feet are under the table.

If you have any questions about the topics referred to in the Panel Bulletin please feel free to get in touch with a member of our team at: SHCapitalMarkets@shlegal.com.