The emergence of post-offer undertakings under the Takeover Code
June 2019 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
June 2019 Issue
Following a consultation regarding the extent to which parties to UK takeover offers may be held to statements they make, the Takeover Code was amended in 2015 to regulate two types of statements made by parties to a takeover offer: (i) post-offer intention statements comprising public statements made by a party to a takeover offer relating to any particular course of action that the party intends to take, or not take, after the takeover offer that is not a post-offer undertaking; and (ii) post-offer undertakings comprising public statements made by a party to a takeover offer relating to any particular course of action that the party commits to take, or not take, after the takeover offer and which is described as a post-offer undertaking.
The objective of the amendments was to provide clarity as to the status of statements made by parties to a takeover offer in relation to action they will, or will not, take following the takeover offer and to increase the enforcement tools available to the Takeover Panel when parties to a takeover offer make voluntary commitments.
Accordingly, a post-offer intention statement must be an accurate reflection of a party’s intention at the time the statement is made and must be made on reasonable grounds. If, during the 12 months following the end of a takeover offer (or such other period specified when the relevant statement is made), a party proposes to take a course of action that is different to the stated intention, the Takeover Panel must be consulted and an announcement made explaining the reasons for the change.
By comparison, before being given, a party must consult with the Takeover Panel on the terms of a post-offer undertaking, which must be specific and precise, apply for a fixed period of time and be subject only to objective conditions or qualifications. So that compliance with a post-offer undertaking can be monitored, the party giving the undertaking periodically must submit written reports to the Takeover Panel, which may be published in whole or in part, and the Takeover Panel may require the appointment of an independent supervisor.
A party giving a post-offer undertaking is, therefore, subject to more onerous restrictions and obligations than if a post-offer intention statement were made. As a possible consequence of the comparatively more onerous regime, post-offer undertakings have arisen in only three transactions, outlined below, since the amendments to the Takeover Code were adopted in 2015.
First, in Softbank Group Corp’s £24.4bn offer for ARM Holdings plc in 2016, Softbank undertook: (i) to at least double ARM’s UK employees in order to enable ARM to continue to develop leading-edge technology in the UK; (ii) to increase ARM’s non-UK employees; (iii) to maintain ARM’s global headquarters in the UK; and (iv) to maintain the proportion of technical employees to non-technical employees broadly in line with historical trends experienced by ARM.
Second, in Melrose Industries plc’s £8.1bn offer for GKN plc in 2018, Melrose undertook: (i) to remain headquartered in the UK; (ii) to retain a listing on the London Stock Exchange; (iii) to ensure that directors would not be appointed if that would result in a majority of directors not being resident in the UK; (iv) to ensure the aerospace and automotive businesses retain access to GKN trademarks; and (v) to maintain a specified level of research and development (R&D) expenditure.
Third, in Comcast Corporation’s £30.6bn offer for Sky plc in 2018, Comcast undertook: (i) to ensure Sky would have the right to use all assets and rights to carry on Sky News; (ii) to commit a minimum annual expenditure to Sky News; (iii) to maintain Sky’s headquarters in Greater London; (iv) not to purchase a controlling interest in any undertakings carrying on a business of publishing any daily, Sunday or local UK newspaper; and (v) to establish an editorial board for Sky News.
Despite only arising in a small number of transactions, there are common features in the post-offer undertakings that have been given.
Transaction value. Each of the takeover offers have been in respect of target companies valued in excess of £5bn and so have been among the largest transactions in the market in the year they were made. Since adoption of the post-offer undertaking regime, there have been approximately 10 public takeovers with a value in excess of £5bn suggesting that while post-offer undertakings have arisen in a very small fraction of public takeovers as a whole since the start of 2015, they have featured in a much larger proportion of the highest value public takeovers.
Public interest. Each transaction attracted a substantial amount of public interest. Softbank’s offer was made at a time of heightened political discussion about the implications of foreign takeovers in the UK and the development of an industrial strategy. Melrose Industries’ offer for GKN resulted in an inquiry by the Business, Energy and Industrial Strategy Committee to provide GKN with an opportunity to set out its plans for its business and for Melrose to explain why it would be better equipped to run a major UK supplier to the automotive and aerospace industries. Sky was also subject to a competing offer from Twenty-First Century Fox whose offer was subject to a protracted regulatory review process regarding media plurality and which gave rise to Twenty-First Century Fox offering remedies to safeguard the independence of Sky News.
Duration. Each bidder gave post-offer undertakings for five years. On completion of the acquisition of Sky, Comcast also executed a deed poll with the effect of extending the undertakings to fund Sky News and ensure its editorial independence from five to 10 years.
The precedent transactions therefore suggest that a party considering a takeover offer for a company subject to the Takeover Code that either has a very large market capitalisation or operates in sectors of the economy that are subject to heightened political sensitivity or media attention should consider the possibility that post-offer undertakings may need to be given. Relevant business operations are likely to be those that could have an impact on national security, supply the defence industry, engage in substantial R&D, operate critical technologies or infrastructure, control or exploit natural resources or otherwise have a substantial number of UK-based employees whose continued employment may be seen to be put at risk by a takeover.
In order for a bidder to be able to give suitable post-offer undertakings it will need to: (i) develop a clear understanding of the prevailing political environment surrounding a target company and its industry; (ii) have an understanding of the position of competing bidders whose need to offer regulatory remedies in order to secure regulatory approval for their takeover offer may cause a bidder to make post-offer undertakings on substantially similar terms to ensure comparability between proposals; (iii) have a thorough understanding of the extent to which investments can be made in a target company and restrictions imposed on a target company’s operations over the medium term without undermining the commercial and strategic rationale for a transaction; and (iv) be prepared to satisfy the Takeover Panel that any undertakings are suitably specific, precise and capable of objective assessment and subject the target business to review by an independent supervisor in respect of any post-offer undertakings.
In an environment of heightened public sensitivity about the economic and social impact of company takeovers, post-offer undertakings may emerge as a more significant feature in ensuring the success of at least the largest UK public takeovers.
Simon J. Little is counsel at Davis Polk & Wardwell. He can be contacted on +44 (0)20 7418 1036 or by email: firstname.lastname@example.org.
© Financier Worldwide
Simon J. Little
Davis Polk & Wardwell